Subprime lobbyists in $370m battle/Few escape blame over subprime explosion

Subprime lobbyists in $370m battle
By Edward Luce in Washington
Copyright The Financial Times Limited 2009
Published: May 6 2009 05:02 | Last updated: May 6 2009 05:02
http://www.ft.com/cms/s/0/ab5cf9aa-39b7-11de-b82d-00144feabdc0.html


The top 25 US originators of subprime mortgages – the risky assets that sparked the global financial crisis – spent almost $370m in Washington over the past decade on lobbying and campaign donations as they tried to ward off tighter regulation of their industry, an investigation has shown.

The study, which will be released today by the Center for Public Integrity, a non-profit investigative journalism organisation, is likely to strengthen public calls for much tougher financial regulation in the US.

It shows that most of the top 25 originators, most of which are now bankrupt, were either owned or heavily financed by the nation’s largest banks, including Citigroup, Goldman Sachs, Wells Fargo, JPMorgan and Bank of America. Together, they originated $1,000bn in subprime mortgages in 2005-07 – almost three-quarters of the total.

The banks, which have received the vast bulk of the $700bn in troubled asset relief funds issued since last October, also supported the lobbying effort to prevent tighter regulation of the subprime market.

Nine of the top 10 lenders were in California, one of the states badly affected by the housing crisis that emerged after a surge in lending to riskier, or subprime, borrowers, many of whom were forced to foreclose.

Federal campaign contributions

Interactive feature: See who took money from the top subprime loan origniators

At least eight of the top 10 were backed at least in part by banks that have received bank bail-out money.

Eleven of the lenders on the CPI list have made payments to settle claims of widespread lending abuses, including four recipients of Tarp funds.

“Their unbridled political contributions and massive lobbying created the lack of regulation and oversight that led to this crisis,” said Bill Buzenberg, who headed the CPI investigation. “Despite the signs, Congress, the White House and the Federal Reserve all dithered while the subprime disaster spread.”

Top of the list was Countrywide Financial, which made $97bn in subprime loans between 2005 and 2007, and which is now owned by BofA, which has received $45bn in troubled asset relief funds from the federal government. Countrywide spent about $11m in campaign donations and lobbying in Washington between 1999 and 2008.

Among the other leading originators, which then bundled the loans to be securitised in the secondary markets, were First Franklin, now owned by Merrill Lynch, which made $68bn of subprime loans in that period and spent over $3m in Washington.

The financial industry was also one of the largest donors to election campaigns in the past decade, giving $2.2bn in contributions, according to the Centre for Responsive Politics, an independent watchdog. Among the top recipients was Barack Obama, who took $14m and whose presidential campaign broke all records by raising more than $700m in contributions.

No one has alleged any connection between Mr Obama’s campaign, which raised most of its cash from small donors, and his administration’s handling of the crisis. However, some liberal critics say the administration is too close to Wall Street and have criticised it for its policy continuity on the financial bail-out with Bush administration. George W. Bush was also a large recipient of campaign funds from the financial and real estate sectors.

The US Treasury will tomorrow release the results of its stress tests of 19 leading banks.




Few escape blame over subprime explosion
By Edward Luce
Copyright The Financial Times Limited 2009
Published: May 6 2009 05:02 | Last updated: May 6 2009 05:02
http://www.ft.com/cms/s/0/1d2c749a-39d9-11de-b82d-00144feabdc0.html


Chronicling the explosion of subprime mortgages is a bit like reading Murder on the Orient Express. As in the novel, in which everyone is revealed to have had a hand in the murder, America’s subprime story implicates almost every power centre – including the Bush administration, the Federal Reserve and the Democratic party.

Take Roland Arnall, founder and chief executive of Ameriquest Mortgage Co, the California-based company that made more than $80bn in subprime mortgages between 2005 and 2007.

Ameriquest was repeatedly held up by regulators and courts for abusive lending practices, most recently in 2006 when it agreed to pay a $325m fine after it was shown it had misled borrowers, falsified documents and pressed appraisers to inflate home values.

The company, which has since closed, gave $263,000 to George W. Bush in campaign contributions. Mr Arnall, who died last year, went on to become Mr Bush’s ambassador to the Netherlands. To keep things even-handed, his company donated $1.57m to the Democratic party.

Between 2005 and 2007, which was the peak of subprime lending, the top 25 subprime originators made almost $1,000bn in loans to more than 5m borrowers, many of whom have had their homes repossessed, says the Center for Public Integrity, a Washington-based journalistic watchdog.

CPI contacted the chief executives or former CEOs of all of the 25 originators. Most did not respond. Of those that did, Goldman Sachs said in a statement: “As an industry, we collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public’s long-term interest.”

Those loans lit the fuse that led to the global financial meltdown. The Fed, which refused to tighten regulation of these non-bank companies, since it is charged only with direct regulation of banks, told Congress it would be too expensive to provide oversight.

Last October Alan Greenspan, former Fed chairman, told a congressional committee: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief.” But resistance to regulation went deeper than Mr Greenspan’s ideological objections.

The CPI investigation shows most originators spent millions of dollars lobbying Washington in the mid-1990s, much of it to prevent new legislation that would tighten restrictions on subprime lending.

The financial sector has spent $3.5bn in the past decade lobbying in Washington and made $2.2bn in campaign donations, says the Center for Responsive Politics, an independent watchdog.

The CPI investigation shows that at least 21 of the 25 top subprime originators, most of which are bankrupt, were either owned or financed by the biggest recipients of troubled asset relief funds, including Citibank, Bank of America, Wells Fargo and JPMorgan – also the largest political donors in Washington.

HSBC, the British bank, is listed as the eighth largest subprime originator because of its purchase of Decision One in 1999 and Household International in 2003. From 1999 to 2008 HSBC donated more than $6.4m and spent $21m on lobbying activities in Washington.

“The largest American and European banks made the bubble in subprime lending possible by financing it on the front end, so they could reap the huge rewards from securitising and selling mortgage-backed securities on the back end,” says Bill Buzenberg, who led the investigation. “Washington was warned repeatedly over the last decade that these high-cost loans represented a systemic risk to the economy. It is hard to believe the major banks were unaware of what was going on, or what the consequences might ultimately be.”

Among the other top originators were New Century Financial Corp, which was alleged by investigators in its 2007 bankruptcy proceedings to have had an “aggressive manner that elevated the risks to dangerous and ultimately fatal levels”. Its largest financial backer was Goldman Sachs, which has received $10bn in Tarp bail-out funds.

One of the few to remain in business is Wells Fargo Financial, which is owned by the bank, which made $51bn in subprime loans between 2005 and 2007 and which spent almost $18m on election donations and lobbying – again almost equally between Democrats and Republicans. Barack Obama was its largest individual recipient with $201,000 in election expenses.

According to the CPI, all the laws that helped fuel the subprime crisis remain. Since the late 1990s there have been attempts to tighten up regulation through legislation. But each time it was shot down.

The report highlights a new bill, sponsored by Barney Frank, a Democratic congressman, which would create “assignee liability provisions” that would make mortgage securitisers res-ponsible for abuses in the original mortgages.

If such a law had been on the books earlier, says CPI, the subprime crisis might never have happened.