New Report Criticizes Banks Behind Subprime Lenders

Who's Behind the Economic Meltdown

Who’s behind the financial meltdown? It’s a question that has been asked often in recent months–one that has been answered in many different ways. Large banks, mortgage companies, and deregulation have all been faulted for their role in the crisis.

The Center for Public Integrity has released a new analysis called “Who’s Behind the Financial Meltdown?” that analyzes the top 25 subprime lenders and the banks that demanded the troublesome loans. In their detailed look at the financial crisis, the Center for Public Integrity finds that those top subprime lenders were either owned or backed by the giant banks that are now collecting bailout money. Indeed, far from being “victims” of the financial crisis, the banks–including prominent ones such as Lehman Brothers, Citigroup, and Merrill Lynch–deliberately financed the lending practices that led to the financial crisis. These high-risk, high-yield bonds backed by home mortgages were aggressively sought by the largest banks in the United States and Europe. Some of these banks later bought up the troubled mortgage companies once they failed.

Some key findings from the report:

    At least 21 of the top 25 subprime lenders were financed by banks that received bailout money — through direct ownership, credit agreements, or huge purchases of loans for securitization.
  • Nine of the top 10 lenders were based in California, including all of the top 5 — Countrywide Financial Corp., Ameriquest Mortgage Co., New Century Financial Corp., First Franklin Corp. and, Long Beach Mortgage Co.
  • Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were non-bank lenders.
  • Eleven of the lenders on the list, including four recipients of bank bailout funds, have made payments to settle claims of widespread lending abuses.

On top of these findings, the report also examines how Washington ignored the risk posed by these loans and in many cases altered regulations that made it easier for banks to pursue these loans.

Michigan to be Lead Plaintiff in Lawsuit against AIG

Michigan AIG Lawsuit

Late last week, Michigan Attorney General Mike Cox announced that the State of Michigan will be the lead plaintiff in a class action lawsuit against AIG. The company–which is now largely owned by the government–lost considerable value after it was revealed that it was conducting risky financial transactions whose true value was disguised.

Michigan’s pension system was invested in AIG and the Attorney General is hoping to recover lost value.

In a press release announcing the lawsuit, the Michigan Attorney General’s office wrote:

“AIG is one of the world’s largest insurance and financial service companies. The class action suit alleges that between November 10, 2006 and June 6, 2008, AIG mislead investors of the true value of Credit Default Swaps, which were securities tied to sub-prime mortgages. When the true value was revealed in 2008, AIG’s stock plummeted from more than $70 per share in 2007 to about $1 per share today.

As lead plaintiff, Michigan will manage the litigation on behalf of a class of AIG stock and bond holders, negotiate potential settlement terms, and seek to maximize the recovery for the class. If the case goes to trial, the lead plaintiff will lead all strategy decisions.”

Michigan is also the lead plaintiff in a similar lawsuit against Bear Stearns.