From 654c0e15965bb48c60a58260c3cd7568977194a3 Mon Sep 17 00:00:00 2001 From: dsc Date: Wed, 21 Dec 2011 19:12:39 -0800 Subject: [PATCH] Haikus. --- data/haikus/haikus-fav.txt | 279 + data/haikus/haikus-longest_chains.txt | 258 + data/haikus/haikus-no_overlap.txt |96309 +++++++++ data/haikus/haikus.txt |349012 +++++++++++++++++++++++++++++++++ data/state.json | 1 - 5 files changed, 445858 insertions(+), 1 deletions(-) create mode 100644 data/haikus/haikus-fav.txt create mode 100644 data/haikus/haikus-longest_chains.txt create mode 100644 data/haikus/haikus-no_overlap.txt create mode 100644 data/haikus/haikus.txt delete mode 100644 data/state.json diff --git a/data/haikus/haikus-fav.txt b/data/haikus/haikus-fav.txt new file mode 100644 index 0000000..19b6d72 --- /dev/null +++ b/data/haikus/haikus-fav.txt @@ -0,0 +1,279 @@ +On line 24: + Commission’s public + hearings, testimony, and + supporting research—that + + can be studied for + years to come. Much of what is + footnoted in this + + can be found on the + website. In addition, more + materials that + + cannot be released + yet for various reasons + will eventually + + made public through the + National Archives and Records + Administration. + + + +On line 26: + extraordinary + commitment and knowledge of + the members of the + + Commission who were + accorded the honor of + this public service. + + + +On line 40: + American people. + We are keenly aware of the + significance of + + +On line 46: + financial upheaval, + if you will—that wreaked havoc in + communities and + + neighborhoods across this + country. As this report goes + to print, there are more + + million Americans + who are out of work, cannot + find full-time work, + + up looking for work. + About four million families + have lost their homes to + + their mortgage payments. + Nearly trillion in household + wealth has vanished, with + + and life savings swept + away. Businesses, large and small, + have felt the sting of + + recession. There is + much anger about what has transpired, + and justifiably + + so. Many people who + abided by all the rules now + find themselves out of + + about their future prospects. + The collateral damage + of this crisis has + + been real people + and real communities. + The impacts of this + + are likely to be + felt for a generation. + And the nation faces + + so many Americans, + we began our exploration + with our own views and + + how the world’s strongest + financial system came to + the brink of collapse. + + + +On line 50: + said about the crisis. + Yet all of us have been deeply + affected by what + + we have learned in the + course of our inquiry. We have + been at various + + times fascinated, + surprised, and even shocked by what + we saw, heard, and read. + + + +On line 52: + the total collapse + of our financial system + and economy or + + +On line 20: + what caused the crisis. + In that sense, the Commission + has functioned somewhat + + + +On line 20: + the federal law + (the Troubled Asset Relief + Program, known as TARP) + + + +On line 467: + U.S. Congress that "the + apparent froth in housing + markets may have spilled + + + +On line 467: + Still, he reassured + legislators that the U.S. + economy was on + + + +On line 4799: + you get to the end + of the week, you go out and + you refinance that + + And then you get to + the end of another week + and you refinance + + + +On line 4815: + did not indicate + substantial deficiencies. + He wasn’t looking + + + +On line 4817: + a former senior + managing director at + Bear Stearns, said, "I guess + + + +On line 7855: + Firms and families + are still deleveraging and are + uncertain about both + + + +On line 4053: + the head of credit + trading at AIG Financial + Products, told Alan Frost, + + "every f***ing rating + agency we’ve spoken to [came] + out with more downgrades" + + + +On line 4053: + mark it. It’s, it’s, uh, + we’re [unintelligible] + f***ed basically." + + + +On line 4073: + that "[AIG] would be in + fine shape if Goldman wasn’t + hanging its head out + + + +On line 4073: + f***ing number that’s well + bigger than we ever planned + for." He acknowledged + + + +On line 5235: + referred to it as + "bullsh*t capital." Still, the + GSEs kept buying more + + + +On line 5949: + I think that was sort + of pie in the sky dreaming." + Geithner agreed, + + and told Reich so + bluntly. Reich told the FCIC + about a phone call from + + after the rescue. + "About all I can remember + is the foul language + + + +On line 5951: + Geithner telling + him. "‘You guys have handed me + a bag of sh*t.’ I + + + +On line 5957: + selecting a weak + federal regulator, + the Office of Thrift + + + +On line 4209: + Central Bank infused + billions of Euros into + overnight lending markets. + + + +On line 4243: + known as "breaking the + buck" and generally leads + to a fund’s collapse. + + + +On line 4245: + including large banks + such as Bank of America, + US Bancorp, and SunTrust, + + + +On line 4245: + US Bancorp, and SunTrust, + purchased SIV assets from their + money market funds. + + + +On line 4249: + which may include wealthy + investors who invest million + or more. Enhanced cash + + + diff --git a/data/haikus/haikus-longest_chains.txt b/data/haikus/haikus-longest_chains.txt new file mode 100644 index 0000000..49574eb --- /dev/null +++ b/data/haikus/haikus-longest_chains.txt @@ -0,0 +1,258 @@ +Longest Chains of Haikus + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + loans. Nevertheless, + subprime loans were necessary + for PMBS, because they + + generally bore + higher interest rates and + thus could support the + + yields that investors were + expecting. As subprime loans + were originated, + + Fannie and Freddie + were willing consumers of those + that might meet the AH + + goals; moreover, because + of their lower cost of funds, + they were able to buy + + the "best of the worst," + the highest quality among + the NTMs on off er. + + Th ese factors—the + need for higher yielding loans + and the ability + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + regulation got + out, industry lobbyists + would rush to complain + + to members of the + congressional committee + with jurisdiction + + over the financial + activity at issue. + According to Levitt, + + these members would then + "harass" the SEC with frequent + letters demanding + + answers to complex + questions and appearances of + officials before + + Congress. These requests + consumed much of the agency’s + time and discouraged + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + making sense. People + were paying inflated prices + for their homes, and they + + didn’t seem to have + enough income to pay for what + they had bought. Within + + a few years, when he + passed some of these same houses, + he saw that they were + + vacant. "For sale" signs + appeared on the front lawns. And + when he passed again, the + + yards were untended + and the grass was turning brown. + Next, the houses went + + into foreclosure, + and that’s when he noticed that + the empty houses + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + former senior vice + president, testified to + the FCIC. "When I left + + Moody’s, an analyst’s + worst fear was that he would do + something, or she, that + + would allow him or + her to be singled out for + jeopardizing Moody’s + + market share."123 Clarkson + denied having a "forceful" + management style, and + + his supervisor, + Raymond McDaniel, told the FCIC that + Clarkson was a "good + + manager."124 Former + team managing director + Gary Witt recalled that + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + billion) to billion) + without engendering the + substantial increase + + in delinquencies that + would ordinarily have + alarmed investors and brought + + the bubble to a + halt.46 Indeed, the absence of + delinquencies had the + + opposite eff ect. + As investors around the world saw + housing prices rise in + + the U.S. without any + signifi cant losses even among + subprime and other + + high-yielding loans, they + were encouraged to buy PMBS + that—although rated AAA—still off + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + at the Financial + Services Roundtable in early + "But we also don’t + + want to encourage + the abuses; indeed, we want + to do what we can + + to stop these abuses."49 + Fed General Counsel Scott + Alvarez told the FCIC, + + "There was concern that + if you put out a broad rule, + you would stop things that + + were not unfair and + deceptive because you were + trying to get at + + the bad practices and + you just couldn’t think of all + of the details you + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + an Industrial + Loan Company," November + pp. To approve such + + a proposal, the + Bank Holding Company Act + requires the Fed to + + determine that a + transaction "can reasonably + be expected to + + produce benefits + to the public, such as greater + convenience, increased + + competition, or + gains in efficiency, that + outweigh possible + + adverse effects, such + as undue concentration + of resources, decreased + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + PMBS. Losses of this + magnitude would certainly + be enough—when combined + + with other losses + on securities and loans + not related to + + mortgages—to call into + question the stability + of a large number + + of banks, investment + banks and other fi nancial + institutions in + + the U.S. and around the + world. However, there was one + other factor that + + exacerbated + the adverse eff ect of the + loss of a market + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + were generally + prime mortgages, did not suff er + substantial losses + + at the outset of + the mortgage meltdown, although + as the fi nancial + + crisis turned into + a recession and housing + prices continued to + + fall, losses among prime + mortgages began to approach + the level of prime + + mortgage losses that + had occurred in past housing + crises. However, those + +- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - + + true, in part, because + CRA loans are generally + loans to low income + + individuals; + as such, they are more likely + than loans to middle + + income borrowers + to be subprime and Alt-A loans + and thus sought aft er + + by FHA, Fannie and + Freddie and subprime lenders such + as Countrywide; this + + competition is + another reason why their + rates are likely to + diff --git a/data/haikus/haikus-no_overlap.txt b/data/haikus/haikus-no_overlap.txt new file mode 100644 index 0000000..947f07b --- /dev/null +++ b/data/haikus/haikus-no_overlap.txt @@ -0,0 +1,96309 @@ +Found 19940 haiku... + +On line 4: + current financial + and economic crisis in + the United States." In + +On line 4: + Commission presents to + the President, the Congress, + and the American + + people the results + of its examination + and its conclusions + + as to the causes + of the crisis. More than two + years after the worst + +On line 6: + financial crisis, + our economy, as well as + communities and + +On line 6: + the after-shocks. Millions + of Americans have lost their + jobs and their homes, and + +On line 6: + rebound. This report + is intended to provide + a historical + + accounting of what + brought our financial system + and economy to + +On line 8: + better understand + how this calamity came to be. + The Commission was + +On line 8: + as part of the Fraud + Enforcement and Recovery + Act (Public Law 111-21) + +On line 10: + by Congress and signed + by the President in May + This independent, + +On line 10: + panel was composed + of private citizens with + experience in + +On line 10: + banking, and consumer + protection. Six members of + the Commission were + +On line 10: + by the Democratic + leadership of Congress and + four members by the + +On line 12: + specific topics + for inquiry and called for the + examination + +On line 12: + collapse of major + financial institutions + that failed or would have + +On line 12: + the government. This + report fulfills these mandates. + In addition, the + +On line 12: + was instructed to + refer to the attorney + general of the + +On line 12: + any appropriate + state attorney general + any person that the + + Commission found may + have violated the laws + of the United States + +On line 12: + relation to the + crisis. Where the Commission + found such potential + +On line 12: + The Commission used + the authority it was + given to issue + +On line 12: + and the production + of documents, but in the + vast majority + +On line 14: + voluntarily + cooperated with this + inquiry. In the course + +On line 14: + millions of pages of + documents, interviewed more + than witnesses, and + +On line 14: + of public hearings + in New York, Washington, D.C., + and communities + +On line 14: + the country that were + hard hit by the crisis. The + Commission also + + drew from a large body + of existing work about the + crisis developed + +On line 14: + government agencies, + academics, journalists, legal + investigators, + +On line 16: + We have tried in this + report to explain in clear, + understandable terms + +On line 16: + complex financial + system worked, how the pieces fit + together, and how + +On line 16: + occurred. Doing so + required research into broad + and sometimes arcane + +On line 16: + risk management. To + bring these subjects out of the + realm of the abstract, + +On line 16: + Financial, Fannie + Mae, Goldman Sachs, Lehman Brothers, + Merrill Lynch, Moody’s, and + + Wachovia. We looked more + generally at the roles + and actions of scores + +On line 18: + We also studied + relevant policies put in + place by successive + +On line 18: + And importantly, + we examined the roles of + policy makers + +On line 18: + Corporation, the + Federal Reserve Board, the + Federal Reserve + +On line 18: + Housing and Urban + Development, the Office + of the Comptroller + + of the Currency, + the Office of Federal + Housing Enterprise + +On line 18: + its successor, the + Federal Housing Finance + Agency), the Office + +On line 18: + Supervision, the + Securities and Exchange + Commission, and the + + Treasury Department. + Of course, there is much work the + Commission did not + +On line 20: + it to delve into + what caused the crisis. In that + sense, the Commission + +On line 20: + other transportation + accidents so that knowledge + of the probable + +On line 20: + can help avoid future + accidents. Nor were we tasked + with evaluating + + the federal law + (the Troubled Asset Relief + Program, known as TARP) + +On line 20: + major financial + institutions. That duty + was assigned to the + +On line 22: + General for TARP. + This report is not the sole + repository of + + what the panel found. + A website will host a wealth + of information + +On line 24: + contain a stockpile + of materials—including + documents and emails, + +On line 24: + Commission’s public + hearings, testimony, and + supporting research—that + + can be studied for + years to come. Much of what is + footnoted in this + +On line 24: + can be found on the + website. In addition, more + materials that + + cannot be released + yet for various reasons + will eventually + +On line 24: + made public through the + National Archives and Records + Administration. + +On line 26: + extraordinary + commitment and knowledge of + the members of the + + Commission who were + accorded the honor of + this public service. + +On line 26: + from the perspectives + shared with commissioners by + thousands of concerned + +On line 26: + and emails. And we are + grateful to the hundreds of + individuals + +On line 26: + personal accounts + in extensive interviews, + testimony, and + + discussions with the + Commission. We want to thank + the Commission staff, + +On line 30: + particular, Wendy + Edelberg, our executive + director, for the + + professionalism, + passion, and long hours they brought + to this mission in + +On line 30: + report would not have + been possible without their + extraordinary + + dedication. With + this report and our website, + the Commission’s work + + comes to a close. We + present what we have found in the + hope that readers can + +On line 32: + this report to reach + their own conclusions, even as + the comprehensive + +On line 38: + record of this crisis + continues to be written. + CONCLUSIONS OF THE + +On line 40: + Commission has been + called upon to examine + the financial and + + economic crisis + that has gripped our country and + explain its causes + +On line 40: + American people. + We are keenly aware of the + significance of + +On line 40: + economic damage + that America has suffered + in the wake of the + +On line 42: + crisis since the Great + Depression. Our task was first + to determine what + +On line 42: + and how it happened + so that we could understand + why it happened. Here + +On line 42: + our conclusions. We + encourage the American + people to join us + +On line 42: + own assessments based + on the evidence gathered + in our inquiry. If + +On line 42: + from history, we + are unlikely to fully + recover from it. + + Some on Wall Street and + in Washington with a stake + in the status quo + + may be tempted to + wipe from memory the events + of this crisis, or + +On line 42: + unravel myths, and + help us understand how the + crisis could have been + + avoided. It is an + attempt to record history, + not to rewrite it, + +On line 44: + allow it to be + rewritten. To help our fellow + citizens better + +On line 44: + conclusions at the + end of chapters in Parts III, + IV, and V of this + + report. The subject + of this report is of no + small consequence to + +On line 46: + nation. The profound + events of and were neither bumps + in the road nor an + + accentuated + dip in the financial and + business cycles we + +On line 46: + come to expect in + a free market economic + system. This was a + +On line 46: + financial upheaval, + if you will—that wreaked havoc in + communities and + + neighborhoods across this + country. As this report goes + to print, there are more + +On line 48: + million Americans + who are out of work, cannot + find full-time work, + +On line 48: + up looking for work. + About four million families + have lost their homes to + +On line 48: + their mortgage payments. + Nearly trillion in household + wealth has vanished, with + +On line 48: + and life savings swept + away. Businesses, large and small, + have felt the sting of + +On line 48: + recession. There is + much anger about what has transpired, + and justifiably + + so. Many people who + abided by all the rules now + find themselves out of + +On line 48: + about their future prospects. + The collateral damage + of this crisis has + + been real people + and real communities. + The impacts of this + +On line 48: + are likely to be + felt for a generation. + And the nation faces + +On line 50: + so many Americans, + we began our exploration + with our own views and + +On line 50: + how the world’s strongest + financial system came to + the brink of collapse. + +On line 50: + our appointment to + this independent panel, + much had already been + +On line 50: + said about the crisis. + Yet all of us have been deeply + affected by what + + we have learned in the + course of our inquiry. We have + been at various + + times fascinated, + surprised, and even shocked by what + we saw, heard, and read. + +On line 52: + revelation. Much + attention over the past two + years has been focused + +On line 52: + the decisions by + the federal government + to provide massive + +On line 52: + financial system + and rescue large financial + institutions that + +On line 52: + important to fail. + Those decisions—and the deep + emotions surrounding + + them—will be debated + long into the future. But + our mission was to + + ask and answer this + central question: how did it + come to pass that in + +On line 52: + the total collapse + of our financial system + and economy or + +On line 52: + and an array of + companies, as millions of + Americans still lost + + their jobs, their savings, + and their homes1 In this report, + we detail the events + +On line 54: + the crisis. But a + simple summary, as we + see it, is useful + + at the outset. While + the vulnerabilities + that created the + +On line 54: + the making, it was + the collapse of the housing + bubble—fueled by + + low interest rates, + easy and available credit, scant + regulation, and + + toxic mortgages— that + was the spark that ignited + a string of events, which + +On line 56: + fall of Trillions of + dollars in risky mortgages had + become embedded + +On line 56: + as mortgage-related + securities were packaged, + repackaged, and sold to + +On line 56: + world. When the bubble + burst, hundreds of billions of + dollars in losses + +On line 56: + to those mortgages and + had borrowed heavily against + them. This happened not + +On line 56: + in the United States + but around the world. The losses + were magnified by + +On line 58: + crisis reached seismic + proportions in September + with the failure of + + Lehman Brothers and the + impending collapse of the + insurance giant + +On line 58: + International + Group (AIG). Panic fanned by a + lack of transparency + +On line 58: + interconnections + among institutions perceived + to be "too big to + + fail," caused the credit + markets to seize up. Trading + ground to a halt. The + +On line 58: + market plummeted. + The economy plunged into + a deep recession. + +On line 60: + financial system + we examined bears little + resemblance to that + +On line 60: + generation. The + changes in the past three decades alone + have been remarkable. + +On line 60: + markets have become + increasingly globalized. + Technology has + +On line 60: + and complexity + of financial instruments + and transactions. There + +On line 60: + costs of financing + than ever before. And the + financial sector + + itself has become + a much more dominant force + in our economy. + +On line 64: + the amount of debt held + by the financial sector + soared from trillion to + +On line 66: + doubling as a share + of gross domestic product. + The very nature of + +On line 66: + to publicly traded + corporations taking greater + and more diverse kinds + +On line 66: + risks. By the largest U.S. + commercial banks held of the + industry’s assets, + +On line 66: + more than double the + level held in On the eve + of the crisis in + +On line 66: + constituted of + all corporate profits in + the United States, up + +On line 66: + in Understanding + this transformation has been + critical to the + +On line 68: + Now to our major + findings and conclusions, which + are based on the facts + +On line 68: + in this report: they + are offered with the hope that + lessons may be learned to + +On line 70: + future catastrophe. + We conclude this financial + crisis was avoidable. + + The crisis was the + result of human action + and inaction, not + + of Mother Nature + or computer models gone + haywire. The captains + +On line 70: + the public stewards + of our financial system + ignored warnings and + +On line 70: + evolving risks within + a system essential to + the well-being of the + +On line 72: + public. Theirs was a + big miss, not a stumble. While + the business cycle + +On line 72: + this magnitude need + not have occurred. To paraphrase + Shakespeare, the fault lies + + not in the stars, but + in us. Despite the expressed + view of many on Wall + +On line 74: + in Washington that + the crisis could not have been + foreseen or avoided, + +On line 74: + were warning signs. The + tragedy was that they were ignored + or discounted. There + +On line 74: + risky subprime lending + and securitization, + an unsustainable + +On line 74: + in household mortgage + debt, and exponential growth + in financial firms’ + +On line 74: + red flags. Yet there was + pervasive permissiveness; + little meaningful + +On line 76: + taken to quell the + threats in a timely manner. + The prime example + +On line 76: + failure to stem the + flow of toxic mortgages, which + it could have done by + +On line 78: + mortgage-lending standards. + The Federal Reserve was + the one entity + +On line 78: + examination + is replete with evidence + of other failures: + +On line 78: + bought, and sold mortgage + securities they never + examined, did not + + care to examine, + or knew to be defective; + firms depended on + + tens of billions of + dollars of borrowing that + had to be renewed + + each and every night, + secured by subprime mortgage + securities; and + +On line 78: + blindly relied on + credit rating agencies as + their arbiters of risk. + +On line 78: + else could one expect + on a highway where there were + neither speed limits + +On line 80: + widespread failures in + financial regulation + and supervision + +On line 80: + devastating to + the stability of the + nation’s financial + + markets. The sentries + were not at their posts, in no + small part due to the + +On line 80: + self-correcting + nature of the markets and + the ability of + +On line 80: + to effectively + police themselves. More than years + of deregulation + +On line 80: + former Federal + Reserve chairman Alan Greenspan and + others, supported + +On line 80: + by the powerful + financial industry at + every turn, had stripped + + away key safeguards, which + could have helped avoid catastrophe. + This approach had opened + + up gaps in oversight + of critical areas with + trillions of dollars + +On line 82: + race to the weakest + supervisor. Yet we do + not accept the view + +On line 82: + regulators lacked + the power to protect the + financial system. + +On line 84: + had ample power + in many arenas and they chose + not to use it. To + +On line 84: + three examples: the + Securities and Exchange + Commission could have + +On line 84: + more capital and + halted risky practices at the + big investment banks. + +On line 86: + Federal Reserve + Bank of New York and other + regulators could + +On line 86: + down on Citigroup’s + excesses in the run-up to + the crisis. They did + +On line 86: + the runaway mortgage + securitization train. + They did not. In case + +On line 86: + the institutions + they oversaw as safe and sound + even in the face of + +On line 86: + downgrading them just + before their collapse. And where + regulators lacked + +On line 86: + Too often, they lacked + the political will—in + a political + +On line 86: + as the fortitude + to critically challenge + the institutions + +On line 88: + system occurred in + many instances as financial + markets evolved. But as + + the report will show, + the financial industry + itself played a key + + role in weakening + regulatory constraints + on institutions, + +On line 88: + and products. It did + not surprise the Commission + that an industry + +On line 88: + would exert pressure + on policy makers and + regulators. From + +On line 88: + individuals + and political action + committees in the + +On line 88: + made more than billion + in campaign contributions. + What troubled us was + + the extent to which + the nation was deprived of + the necessary strength + +On line 88: + independence of + the oversight necessary to + safeguard financial + +On line 90: + dramatic failures + of corporate governance + and risk management + +On line 90: + institutions were + a key cause of this crisis. + There was a view that + +On line 90: + self-preservation + inside major financial + firms would shield them from + + fatal risk-taking + without the need for a steady + regulatory + +On line 90: + argued, would stifle + innovation. Too many of + these institutions + +On line 90: + too much risk, with too + little capital, and with + too much dependence + +On line 90: + In many respects, this + reflected a funda-CONCLUSIONS OF THE + FINANCIAL CRISIS + +On line 90: + these institutions, + particularly the large + investment banks and + +On line 90: + lenders and creating, + packaging, repackaging, and + selling trillions of + +On line 92: + products. Like Icarus, they + never feared flying ever + closer to the sun. + +On line 94: + grew aggressively + through poorly executed + acquisition and + +On line 94: + more challenging. The + CEO of Citigroup told the + Commission that a + +On line 94: + billion position + in highly rated mortgage + securities would + + "not in any way have + excited my attention," + and the co-head of + +On line 94: + investment bank said + he spent "a small fraction of + of his time on those + +On line 96: + In this instance, too + big to fail meant too big to + manage. Financial + +On line 96: + instances. Too often, + risk management became risk + justification. + +On line 98: + short-term gain—without + proper consideration + of long-term consequences. + + Often, those systems + encouraged the big bet—where + the payoff on the + + upside could be huge + and the downside limited. + This was the case up + + and down the line—from + the corporate boardroom to + the mortgage broker + +On line 100: + examination + revealed stunning instances of + governance breakdowns + +On line 100: + read, among other things, + about AIG senior management’s + ignorance of the + +On line 100: + company’s billion + derivatives exposure + to mortgage-related + +On line 100: + Fannie Mae’s quest for + bigger market share, profits, + and bonuses, which led + + it to ramp up its + exposure to risky loans and + securities as + + the housing market + was peaking; and the costly + surprise when Merrill + +On line 100: + that the company + held billion in "super-senior" + and supposedly + +On line 102: + securities that + resulted in billions of + dollars in losses. + +On line 104: + a combination + of excessive borrowing, + risky investments, and + + lack of transparency + put the financial system + on a collision + +On line 104: + with crisis. Clearly, + this vulnerability + was related to + +On line 104: + and regulation, + but it is significant + enough by itself to + +On line 106: + our attention here. + In the years leading up to + the crisis, too many + +On line 106: + as too many households, + borrowed to the hilt, leaving + them vulnerable + +On line 106: + financial distress + or ruin if the value + of their investments + +On line 108: + even modestly. For + example, as of the five + major investment + + banks—Bear Stearns, Goldman Sachs, + Lehman Brothers, Merrill Lynch, and + Morgan Stanley—were + + operating with + extraordinarily thin + capital. By one + +On line 108: + measure, their leverage + ratios were as high as to + meaning for every + +On line 108: + in assets, there was + only in capital to + cover losses. Less + +On line 108: + a drop in asset + values could wipe out a firm. + To make matters worse, + +On line 108: + borrowing had to + be renewed each and every + day. For example, + +On line 108: + Stearns had billion in + equity and billion in + liabilities + +On line 108: + and was borrowing + as much as billion in the + overnight market. It was + +On line 108: + a small business with + in equity borrowing + million, with of that + + due each and every + day. One can’t really ask + "What were they thinking1" + + when it seems that too + many of them were thinking alike. + And the leverage was + +On line 110: + "window dressing" of + financial reports available + to the investing + + public. The kings of + leverage were Fannie Mae and + Freddie Mac, the two + +On line 112: + the end of Fannie’s + and Freddie’s combined leverage + ratio, including + +On line 114: + owned and guaranteed, + stood at to But financial + firms were not alone in + +On line 114: + the borrowing spree: + from to national mortgage + debt almost doubled, + +On line 114: + the amount of mortgage + debt per household rose more than + from to even while wages + +On line 114: + the housing downturn + hit, heavily indebted + financial firms and + +On line 116: + institutions was + exacerbated by the + risky assets they were + +On line 116: + debt. As the mortgage + and real estate markets + churned out riskier and + +On line 116: + securities, many + financial institutions + loaded up on them. + +On line 116: + the end of Lehman had + amassed billion in commercial + and residential + +On line 116: + securities, which + was almost twice what it held + just two years before, + + and more than four times + its total equity. And + again, the risk wasn’t + +On line 116: + taken on just by + the big financial firms, but + by families, too. + +On line 116: + mortgage borrowers + in and took out "option ARM" + loans, which meant they could + +On line 118: + make payments so low + that their mortgage balances rose + every month. Within + +On line 118: + financial system, + the dangers of this debt were + magnified because + + transparency was not + required or desired. Massive, + short-term borrowing, + +On line 118: + obligations unseen + by others in the market, + heightened the chances the + +On line 118: + rapidly unravel. + In the early part of the + 20th century, we + +On line 118: + protections—the + Federal Reserve as a + lender of last resort, + +On line 118: + deposit insurance, + ample regulations—to + provide a bulwark + +On line 118: + had regularly + plagued America’s banking + system in the 19th + +On line 118: + over the past 30-plus years, + we permitted the growth of + a shadow banking + +On line 118: + and laden with short-term + debt—that rivaled the size of + the traditional + +On line 118: + of over-the-counter derivatives—were + hidden from view, without the + protections we had + +On line 118: + financial meltdowns. + We had a 21st-century + financial system + + with 19th-century + safeguards. When the housing and + mortgage markets cratered, + +On line 120: + lack of transparency, + the extraordinary debt + loads, the short-term loans, + +On line 120: + risky assets all came + home to roost. What resulted + was panic. We had + +On line 122: + reaped what we had sown. + We conclude the government + was ill prepared for + +On line 122: + response added to the + uncertainty and panic + in the financial + +On line 122: + As part of our charge, + it was appropriate to + review government + +On line 122: + in response to the + developing crisis, not + just those policies or + +On line 122: + it, to determine + if any of those responses + contributed to or + + exacerbated + the crisis. As our report + shows, key policy + +On line 124: + Treasury Department, + the Federal Reserve Board, + and the Federal + +On line 124: + Bank of New York—who + were best positioned to watch + over our markets were + +On line 126: + ill prepared for the + events of and Other agencies + were also behind + +On line 126: + were hampered because + they did not have a clear grasp + of the financial + +On line 126: + charged with overseeing, + particularly as it + had evolved in the years + + leading up to the + crisis. This was in no small + measure due to the + +On line 126: + of transparency in + key markets. They thought risk had + been diversified + + when, in fact, it had + been concentrated. Time and + again, from the spring of + +On line 126: + an ad hoc basis + with specific programs to + put fingers in the + +On line 126: + comprehensive and + strategic plan for containment, + because they lacked a + +On line 126: + interconnections + in the financial markets. + Some regulators + + have conceded this + error. We had allowed the + system to race ahead + + of our ability + to protect it. While there was + some awareness of, or + +On line 128: + least a debate about, + the housing bubble, the record + reflects that senior + +On line 128: + officials did not + recognize that a bursting + of the bubble could + +On line 128: + threaten the entire + financial system. Throughout + the summer of both + + Federal Reserve + Chairman Ben Bernanke and Treasury + Secretary Henry + +On line 128: + that the turmoil in + the subprime mortgage markets + would be contained. When + + Bear Stearns’s hedge funds, which + were heavily invested + in mortgage-related + +On line 128: + implications of + the collapse. Despite the fact + that so many other + + funds were exposed to + the same risks as those hedge funds, + the Bear Stearns funds were + +On line 128: + be "relatively + unique." Days before the collapse + of Bear Stearns in March + +On line 130: + SEC Chairman Christopher + Cox expressed "comfort about the + capital cushions" + +On line 130: + big investment banks. + It was not until August + just weeks before the + +On line 130: + Mae and Freddie Mac, + that the Treasury Department + understood the full + +On line 130: + conditions of those + two institutions. And just + a month before Lehman’s + +On line 130: + Bank of New York was + still seeking information + on the exposures + +On line 132: + In addition, the + government’s inconsistent + handling of major + +On line 132: + rescue Bear Stearns and + then to place Fannie Mae and + Freddie Mac into + +On line 132: + Lehman Brothers and then + to save AIG—increased uncertainty + and panic in the + +On line 134: + we deeply respect and + appreciate the efforts + made by Secretary + +On line 134: + Bernanke, and Timothy + Geithner, formerly + president of the + +On line 134: + Bank of New York and + now treasury secretary, and + so many others who + +On line 134: + to stabilize our + financial system and our + economy in the + +On line 136: + a systemic breakdown + in accountability and + ethics. The integrity + +On line 136: + and the public’s trust in + those markets are essential + to the economic + +On line 136: + financial system + and our economy rely + on the notions of + +On line 136: + In our economy, + we expect businesses and + individuals + +On line 136: + pursue profits, at + the same time that they produce + products and services + +On line 138: + been the case in past + speculative booms and busts—we + witnessed an erosion + +On line 138: + exacerbated + the financial crisis. This + was not universal, + + but these breaches stretched + from the ground level to the + corporate suites. They + +On line 138: + in significant + financial consequences but + also in damage + +On line 138: + the trust of investors, + businesses, and the public + in the financial + +On line 140: + according to one + measure, that the percentage + of borrowers who + +On line 140: + just a matter of + months after taking a loan + nearly doubled from + +On line 140: + the summer of to + late This data indicates + they likely took out + +On line 140: + the capacity + or intention to pay. You + will read about mortgage + + brokers who were paid + "yield spread premiums" by lenders + to put borrowers + + into higher-cost + loans so they would get bigger + fees, often never + +On line 140: + mortgage fraud grew 20-fold + between and and then more than + doubled again between + +On line 142: + and One study places the + losses resulting from fraud + on mortgage loans made + +On line 144: + at billion. Lenders made + loans that they knew borrowers + could not afford and + +On line 144: + of the loans they were + originating could result + in "catastrophic + + consequences." Less than + a year later, they noted + that certain high-risk + +On line 144: + result not only + in foreclosures but also + in "financial and + + reputational + catastrophe" for the firm. But + they did not stop. And + +On line 146: + sampled loans they were + purchasing to package and + sell to investors. They + +On line 146: + a significant + percentage of the sampled + loans did not meet their + +On line 146: + of many prospectuses + provided to investors found + that this critical + + information was + not disclosed. THESE CONCLUSIONS + must be viewed in the + +On line 148: + to pin this crisis + on mortal flaws like greed and + CONCLUSIONS OF THE + +On line 148: + COMMISSION xxiii + hubris would be simplistic. It + was the failure to + +On line 150: + for human weakness + that is relevant to this + crisis. Second, we + +On line 150: + believe the crisis + was a result of human + mistakes, misjudgments, + +On line 150: + in systemic failures + for which our nation has paid + dearly. As you read + + this report, you will + see that specific firms and + individuals + +On line 150: + Yet a crisis of + this magnitude cannot be + the work of a few + + bad actors, and such + was not the case here. At the + same time, the breadth of + +On line 150: + is at fault"; many firms + and individuals did + not participate + +On line 152: + We do place special + responsibility with + the public leaders + + charged with protecting + our financial system, those + entrusted to run + +On line 152: + chief executives + of companies whose failures + drove us to crisis. + +On line 152: + of significant + responsibility and + obligation. Tone at + + the top does matter + and, in this instance, we were + let down. No one said + +On line 152: + must also accept + responsibility for + what we permitted + +On line 154: + unanimously, we + acquiesced to or embraced + a system, a set + +On line 160: + and actions, that gave + rise to our present predicament. THIS + REPORT DESCRIBES THE + +On line 160: + and the system that + propelled our nation toward + crisis. The complex + + machinery of our + financial markets has many + essential gears—some + +On line 160: + a critical role + as the crisis developed + and deepened. Here we + +On line 160: + our conclusions about + specific components of + the system that we + + believe contributed + significantly to the + financial meltdown. + +On line 162: + pipeline lit and spread + the flame of contagion and + crisis. When housing + + prices fell and mortgage + borrowers defaulted, the + lights began to dim + +On line 164: + toxic mortgages from + neighborhoods across America + to investors around the + + globe. Many mortgage lenders + set the bar so low that lenders + simply took eager + +On line 166: + disregard for a + borrower’s ability to + pay. Nearly one-quarter + +On line 166: + made in the first half + of were interest-only loans. + During the same year, + +On line 166: + originated by + Countrywide and Washington + Mutual had low- + +On line 168: + lending, including + predatory and fraudulent + practices, became more + +On line 168: + Federal Reserve + and other regulators + and authorities + + heard warnings from many + quarters. Yet the Federal + Reserve neglected + +On line 168: + mission "to ensure + the safety and soundness of + the nation’s banking + +On line 168: + financial system + and to protect the credit + rights of consumers." It + +On line 168: + build the retaining + wall before it was too late. + And the Office of + +On line 168: + the Office of Thrift + Supervision, caught up in + turf wars, preempted + + state regulators + from reining in abuses. While + many of these mortgages + + were kept on banks’ books, + the bigger money came from + global investors who + +On line 170: + cash into newly + created mortgage-related + securities. It + +On line 170: + regulators alike + that risk had been conquered: the + investors held highly + +On line 170: + they thought were sure to + perform; the banks thought they had + taken the riskiest + +On line 170: + firms making profits + and borrowing costs reduced. + But each step in the + +On line 170: + on the next step to + keep demand going. From the + speculators who + + flipped houses to the + mortgage brokers who scouted + the loans, to the lenders + +On line 170: + firms that created + the mortgage-backed securities, + collateralized + +On line 170: + obligations (CDOs), CDOs + squared, and synthetic CDOs: no + one in this pipeline + + of toxic mortgages + had enough skin in the game. They + all believed they could + + off-load their risks on + a moment’s notice to the + next person in line. + +On line 170: + wrong. When borrowers + stopped making mortgage payments, + the losses—amplified + +On line 170: + through the pipeline. As + it turned out, these losses were + concentrated in + +On line 172: + millions of mortgages + so efficiently has proven + to be difficult + +On line 172: + erected barriers + to modifying mortgages + so families can + +On line 174: + housing market and + financial institutions. + We conclude over-the-counter + +On line 174: + The enactment of + legislation in to ban + the regulation + +On line 174: + the federal and + state governments of over-the-counter + (OTC) derivatives + + was a key turning + point in the march toward the + financial crisis. + +On line 176: + to corporations, + to farmers, and to investors, + derivatives have + + been used to hedge against, + or speculate on, changes in + prices, rates, or indices + + or even on events such + as the potential defaults + on debts. Yet, without + +On line 176: + rapidly spiraled out + of control and out of sight, + growing to trillion + +On line 176: + and collateral + requirements; speculation; + interconnections + +On line 178: + in this market. OTC + derivatives contributed + to the crisis in + +On line 178: + sold to investors to + protect against the default or + decline in value + + of mortgage-related + securities backed by risky + loans. Companies sold + +On line 178: + tune of billion, in + AIG’s case—to investors in these + newfangled mortgage + +On line 178: + to launch and expand + the market and, in turn, to + further fuel the + +On line 180: + were essential to + the creation of synthetic + CDOs. These synthetic + +On line 180: + on the performance + of real mortgage-related + securities. They + +On line 180: + multiple bets on + the same securities and + helped spread them throughout + +On line 182: + system. Goldman Sachs + alone packaged and sold billion + in synthetic CDOs + +On line 182: + July CONCLUSIONS + OF THE FINANCIAL CRISIS + INQUIRY COMMISSION + +On line 184: + to May Synthetic + CDOs created by Goldman + referenced more than + +On line 186: + securities, and + of them were referenced at + least twice. This is apart + +On line 188: + in synthetic CDOs + created by other firms. + Finally, when the + +On line 188: + and crisis followed, + derivatives were in the + center of the storm. + +On line 188: + not been required to + put aside capital reserves + as a cushion for + + the protection it + was selling, was bailed out when + it could not meet its + +On line 188: + committed more than + billion because of concerns + that AIG’s collapse would + + trigger cascading + losses throughout the global + financial system. + +On line 188: + the existence of + millions of derivatives + contracts of all types + +On line 188: + panic, helping to + precipitate government + assistance to those + +On line 190: + conclude the failures + of credit rating agencies + were essential cogs + +On line 190: + wheel of financial + destruction. The three credit + rating agencies were + +On line 190: + of the financial + meltdown. The mortgage-related + securities at + +On line 190: + heart of the crisis + could not have been marketed + and sold without their + +On line 190: + regulatory + capital standards were hinged + on them. This crisis + + could not have happened + without the rating agencies. + Their ratings helped the + +On line 190: + market soar and their + downgrades through and wreaked havoc + across markets and firms. + + In our report, you + will read about the breakdowns at + Moody’s, examined by + +On line 192: + This compares with six + private-sector companies + in the United States + +On line 192: + early In alone, Moody’s + put its triple-A stamp of approval + on mortgage-related + +On line 192: + were disastrous: of + the mortgage securities + rated triple-A that year + + ultimately were + downgraded. You will also + read about the forces at + +On line 194: + behind the breakdowns + at Moody’s, including the flawed + computer models, + +On line 194: + from financial firms + that paid for the ratings, the + relentless drive for + + market share, the lack + of resources to do the job + despite record profits, + + and the absence of + meaningful public oversight. + And you will see that + + without the active + participation of the + rating agencies, the + +On line 194: + for mortgage-related + securities could not have + been what it became. + +On line 200: + ARE MANY COMPETING + VIEWS as to the causes of + this crisis. In this + +On line 200: + the Commission has + endeavored to address key + questions posed to us. + +On line 200: + availability and + excess liquidity, the + role of Fannie Mae + + and Freddie Mac (the + GSEs), and government housing + policy. First, as + +On line 200: + in our report, we + outline monetary policies + and capital flows + +On line 200: + years leading up to + the crisis. Low interest + rates, widely available + +On line 200: + international + investors seeking to put their + money in real + +On line 202: + a credit bubble. + Those conditions created + increased risks, which should + + have been recognized + by market participants, + policy makers, + +On line 202: + liquidity did + not need to cause a crisis. + It was the failures + +On line 202: + in excesses in + the mortgage and financial + markets—that were the + + principal causes + of this crisis. Indeed, the + availability of + +On line 204: + directions. Second, + we examined the role of + the GSEs, with Fannie + +On line 204: + government-sponsored + enterprises had a deeply + flawed business model + +On line 204: + corporations with + the implicit backing of + and subsidies from + +On line 206: + mortgage exposure + and market position were + significant. In + +On line 208: + and they decided + to ramp up their purchase and + guarantee of risky + +On line 208: + just as the housing + market was peaking. They used + their political + +On line 208: + for decades to ward off + effective regulation + and oversight—spending + +On line 210: + on lobbying from + to They suffered from many of + the same failures of + +On line 210: + management as the + Commission discovered in + other financial + +On line 212: + the third quarter of + the Treasury Department had + provided billion + +On line 214: + We conclude that these + two entities contributed + to the crisis, but + +On line 214: + maintained their value + throughout the crisis and did + not contribute to + + the significant + financial firm losses that + were central to the + + financial crisis. + The GSEs participated + in the expansion + +On line 216: + subprime and other + risky mortgages, but they followed + rather than led Wall Street + +On line 216: + other lenders in the + rush for fool’s gold. They purchased + the highest rated + +On line 216: + added helium to + the housing balloon, but their + purchases never + +On line 216: + majority of + the market. Those purchases + represented of + +On line 218: + non-GSE subprime mortgage-backed + securities in with the + share rising to in + +On line 218: + loans and related + securities in order + to meet stock market + +On line 218: + regain market share, + and to ensure generous + compensation for + + their executives + and employees—justifying + their activities + +On line 218: + the broad and sustained + public policy support + for homeownership. + +On line 220: + of the loans purchased + or guaranteed by Fannie + and Freddie. While they + +On line 220: + substantial losses, + delinquency rates for GSE loans + were substantially + +On line 220: + securitized by + other financial firms. For + example, data + +On line 220: + Commission for a + subset of borrowers with + similar credit + +On line 220: + below 660—show that by + the end of GSE mortgages were + far less likely to + +On line 222: + non-GSE securitized + mortgages: versus We also + studied at length how + +On line 222: + Development’s (HUD’s) + affordable housing goals for + the GSEs affected + +On line 222: + CONCLUSIONS OF THE + FINANCIAL CRISIS INQUIRY + COMMISSION xxvii risky + +On line 222: + on the evidence + and interviews with dozens of + individuals + +On line 222: + this subject area, we + determined these goals only + contributed marginally + +On line 224: + Fannie’s and Freddie’s + participation in those + mortgages. Finally, + +On line 224: + the matter of whether + government housing policies + were a primary + +On line 224: + for decades, government + policy has encouraged + homeownership through + +On line 224: + programs, and mandates. + These policies were put in place + and promoted by + +On line 224: + and Congresses—indeed, + both Presidents Bill Clinton + and George W. Bush set + +On line 226: + homeownership. In + conducting our inquiry, we + took a careful look + +On line 226: + noted above, and the + Community Reinvestment + Act (CRA). The CRA was + +On line 226: + enacted in to + combat "redlining" by banks—the + practice of denying + +On line 226: + individuals + and businesses in certain + neighborhoods without + +On line 226: + The CRA requires banks + and savings and loans to lend, + invest, and provide + +On line 228: + the CRA was not a + significant factor in + subprime lending or + +On line 228: + subprime lenders were not + subject to the CRA. Research + indicates only + +On line 228: + of high-cost loans—a + proxy for subprime loans—had any + connection to the + + law. Loans made by CRA-regulated + lenders in the neighborhoods in + which they were required + +On line 228: + were half as likely + to default as similar + loans made in the same + +On line 228: + by independent + mortgage originators not + subject to the law. + +On line 230: + this respect: As a + nation, we set aggressive + homeownership goals + +On line 230: + extend credit to + families previously + denied access to + +On line 230: + the philosophy + of opportunity was + being matched by the + +On line 230: + ground. Witness again the + failure of the Federal + Reserve and other + +On line 230: + irresponsible + lending. Homeownership peaked + in the spring of and + +On line 230: + began to decline. + From that point on, the talk of + opportunity + +On line 230: + tragically at + odds with the reality + of a financial + +On line 236: + disaster in the + making. WHEN THIS COMMISSION + began its work months + +On line 236: + some imagined that the + events of and their consequences + would be well behind + + us by the time we + issued this report. Yet more + than two years after + +On line 236: + an unprecedented + manner in our financial + markets, our country + +On line 236: + aftereffects of + the calamity. Our financial + system is, in many + + respects, still unchanged + from what existed on the + eve of the crisis. + +On line 236: + in the wake of the + crisis, the U.S. financial + sector is now more + +On line 236: + While we have not been + charged with making policy + recommendations, + + the very purpose of + our report has been to take + stock of what happened + +On line 236: + we can plot a new + course. In our inquiry, we found + dramatic breakdowns + +On line 236: + profound lapses in + regulatory oversight, + and near fatal flaws + +On line 238: + series of choices + and actions led us toward + a catastrophe for + +On line 238: + we were ill prepared. + These are serious matters + that must be addressed + +On line 238: + to restore faith in + our financial markets, to + avoid the next crisis, + +On line 238: + rebuild a system + of capital that provides + the foundation for + +On line 240: + shared prosperity. + The greatest tragedy would be to + accept the refrain + +On line 240: + no one could have seen + this coming and thus nothing + could have been done. If + +On line 242: + this notion, it will + happen again. This report should + not be viewed as the + + end of the nation’s + examination of this + crisis. There is still + +On line 244: + is our collective + responsibility. It + falls to us to make + +On line 261: + we want different + results. PART I Crisis on + the Horizon BEFORE + +On line 263: + examining the + worst financial meltdown since + the Great Depression, + +On line 263: + Financial Crisis + Inquiry Commission reviewed + millions of pages of + +On line 265: + people from all walks + of life—to find out how and + why it happened. In + +On line 265: + public officials + testified that they had been + blindsided by the + + crisis, describing + it as a dramatic and + mystifying turn + + of events. Even among those + who worried that the housing + bubble might burst, few—if + +On line 267: + the magnitude of + the crisis that would ensue. + Charles Prince, the former + +On line 267: + chief executive + officer of Citigroup + Inc., called the collapse + +On line 267: + housing prices "wholly + unanticipated."1 Warren + Buffett, the chairman + +On line 267: + of Berkshire Hathaway + Inc., which until was the largest + single shareholder + +On line 267: + Moody’s Corporation, + told the Commission that "very, + very few people could + +On line 267: + the bubble," which he + called a "mass delusion" shared by + million Americans."2 + +On line 267: + the chairman and chief + executive officer + of Goldman Sachs Group, + +On line 269: + likened the financial + crisis to a hurricane.3 + Regulators echoed + +On line 269: + similar refrain. + Ben Bernanke, the chairman of the + Federal Reserve + +On line 269: + told the Commission + a "perfect storm" had occurred + that regulators + +On line 269: + when asked about whether the + Fed’s lack of aggressiveness + in regulating + +On line 269: + market during the + housing boom was a failure, + Bernanke responded, "It + +On line 269: + indeed. I think it + was the most severe failure + of the Fed in this + +On line 269: + episode."4 Alan Greenspan, the Fed + chairman during the two decades + leading up to the + +On line 269: + Commission that it + was beyond the ability + of regulators + +On line 271: + cannot identify + the timing of a crisis, + or anticipate + + exactly where it + will be located or how + large the losses and + + spillovers will be."5 In fact, + there were warning signs. In the + decade preceding the + +On line 273: + there were many signs that + house prices were inflated, that + lending practices had + + spun out of control, + that too many homeowners were + taking on mortgages + + and debt they could ill + afford, and that risks to the + financial system + +On line 273: + were clanging inside + financial institutions, + regulatory + +On line 273: + organizations, + state law enforcement agencies, + and corporations + + throughout America, + as well as in neighborhoods + across the country. Many + +On line 273: + to avoid the train wreck. + While countless Americans joined + in the financial + +On line 273: + others were shouting + to government officials + in Washington and + +On line 273: + to what would become + a human disaster, not + just an economic + +On line 275: + "Everybody in the + whole world knew that the mortgage + bubble was there," said + +On line 275: + the former chairman + of the Securities and + Exchange Commission + +On line 275: + President George H. + W. Bush. "I mean, it wasn’t + hidden. You cannot + +On line 275: + at any of this and + say that the regulators + did their job. This was + +On line 275: + some hidden problem. + It wasn’t out on Mars or + Pluto or somewhere. + +On line 275: + It was right here. You + can’t make trillions of dollars’ + worth of mortgages and + +On line 277: + notice."6 Paul McCulley, a + managing director at + PIMCO, one of the + +On line 277: + money management + firms, told the Commission that + he and his colleagues + +On line 277: + to get worried about + "serious signs of bubbles" + in they therefore sent + +On line 279: + cities to do what he + called "old-fashioned shoe-leather research," + talking to real + +On line 279: + brokers, and local + investors about the housing and + mortgage markets. They + +On line 279: + outright degradation + of underwriting standards," + McCulley asserted, and + +On line 279: + shared what they had learned + when they got back home to the + company’s Newport + +On line 279: + when our group came back, + they reported what they saw, + and we adjusted + +On line 281: + those who remembered + the savings and loan crisis, + knew that age-old rules of + +On line 281: + cast aside. Arnold Cattani, + the chairman of Bakersfield, + California–based + +On line 281: + the Commission that + he grew uncomfortable with + the "pure lunacy" + +On line 281: + saw in the local + home-building market, fueled + by "voracious" Wall + +On line 281: + investment banks; he + thus opted out of certain + kinds of investments + +On line 283: + vice chairman and chief + executive officer + of Service 1st Bank + + of Nevada, told the + FCIC that the desire for a + "high and quick return" + + blinded people to + fiscal realities. "You + may recall Tommy + + Lee Jones in Men in + Black, where he holds a device + in the air, and with + +On line 283: + bright flash wipes clean the + memories of everyone + who has witnessed an + +On line 285: + event," he said.9 Unlike + so many other bubbles—tulip bulbs + in Holland in the + +On line 285: + South Sea stocks in the + 1700s, Internet stocks in the + late 1990s—this one involved + +On line 285: + the economy: the + family home. Homes are the + foundation upon + +On line 285: + economic structures + rest. Children usually go + to schools linked to their + +On line 285: + addresses; local + governments decide how much + money they can spend + + on roads, firehouses, + and public safety based on + how much property + + tax revenue they have; + house prices are tied to consumer + spending. Downturns in + +On line 289: + cause ripple effects + almost everywhere. When the + Federal Reserve + +On line 289: + mortgage rates fell, home + refinancing surged, climbing + from billion in to + +On line 289: + allowing people + to withdraw equity built + up over previous + + decades and to consume + more, despite stagnant wages. Home + sales volume started + +On line 289: + and average home + prices nationwide climbed, rising + in eight years by one + +On line 289: + measure and hitting + a national high of in + early Home prices in + +On line 289: + skyrocketed: prices + increased nearly two and one-half + times in Sacramento, + +On line 289: + example, in just + five years,12 and shot up by about + the same percentage + +On line 289: + Prices about doubled in + more than metropolitan + areas, including + +On line 289: + Poughkeepsie, San Diego, + and West Palm Beach.13 Housing starts + nationwide climbed from + +On line 291: + reached a record in the + spring of although it wouldn’t + rise an inch further + +On line 291: + machine kept churning + for another three years. By + refinancing their + +On line 293: + equity between + and including billion in + alone, more than seven + +On line 293: + speculators and + potential homeowners stood + in line outside new + +On line 293: + for a chance to buy + houses before the ground had + even been broken. By + +On line 293: + the first half of more + than one out of every ten + home sales was to an + +On line 293: + or someone buying + a second home.15 Bigger was + better, and even the + +On line 293: + ballooned in size; the + floor area of an average + new home grew by to + +On line 295: + decade from to Money + washed through the economy like + water rushing through + +On line 297: + Low interest rates + and then foreign capital + helped fuel the boom. + +On line 297: + real estate agents, + loan brokers, and appraisers + profited on Main + + Street, while investment + bankers and traders on Wall Street moved + even higher on the + + American earnings + pyramid and the share prices of + the most aggressive + +On line 297: + firms reached all-time + highs.16 Homeowners pulled cash out + of their homes to send + + their kids to college, + pay medical bills, install + designer kitchens with + +On line 297: + vacations, or launch + new businesses. They also + paid off credit cards, + +On line 297: + as personal debt + rose nationally. Survey + evidence shows that + +On line 297: + homeowners pulled out + cash to buy a vehicle + and over spent the cash + +On line 297: + tax payments, clothing, + gifts, and living expenses.17 + Renters used new forms of + +On line 297: + homes and to move to + suburban subdivisions, + erect-ing swing sets in + +On line 299: + backyards and enrolling + their children in local schools. + In an interview + +On line 299: + the longtime CEO of + Countrywide Financial—a lender + brought down by its risky + +On line 301: + rush" mentality + overtook the country during + these years, and that he + +On line 301: + swept up in it as + well: "Housing prices were rising + so rapidly—at a rate + +On line 301: + that I’d never seen + in my years in the business—that + people, regular + + people, average + people got caught up in the + mania of buying + + a house, and flipping + it, making money. It was + happening. They buy + +On line 303: + house, make and talk at + a cocktail party about it. + Housing suddenly + + went from being part + of the American dream to + house my family + + to settle down—it + became a commodity. + That was a change in + +On line 305: + the culture. It was + sudden, unexpected."18 On + the surface, it looked + +On line 305: + into investments + called securities, which kept + cash flowing from Wall + + Street into the U.S. + housing market—were tools that had + worked well for many years. + +On line 307: + going wrong. Like a + science fiction movie in which + ordinary household + +On line 307: + were being transformed. + The time-tested 30-year fixed-rate mortgage, + with a down payment, + +On line 307: + of style. There was a + burgeoning global demand + for residential + +On line 307: + securities that + offered seemingly solid + and secure returns. + +On line 307: + around the world clamored + to purchase securities + built on American + +On line 309: + estate, seemingly + one of the safest bets in the + world. Wall Street labored + +On line 309: + demand. Bond salesmen + earned multi-million-dollar + bonuses packaging + + and selling new kinds + of loans, offered by new kinds + of lenders, into new + + kinds of investment + products that were deemed safe but + possessed complex and + +On line 309: + changes—these financial + innovations, they said, had + lowered borrowing + +On line 309: + consumers and moved risks + away from the biggest and most + systemically + +On line 309: + in ways that were not + understood by either the + captains of finance + +On line 309: + the system’s public + stewards. In fact, some of the + largest institutions + +On line 309: + on what would prove to + be debilitating risks. + Trillions of dollars + + had been wagered on + the belief that housing prices + would always rise and + + that borrowers would + seldom default on mortgages, + even as their debt grew. + +On line 309: + loans had been bundled + into investment products + in ways that seemed to + +On line 309: + worlds—high-yield, risk-free—but + instead, in many cases, would + prove to be high-risk + + and yield-free. All this + financial creativity + was a lot "like cheap + +On line 311: + Mayo, a managing + director and financial + services analyst + +On line 311: + repackaged to sell at + a premium," he told the + Commission. "It might + + taste good for a while, + but then you get headaches later + and you have no idea + +On line 313: + really inside."19 + The securitization + machine began to + +On line 313: + these once-rare mortgage + products with their strange-sounding + names: Alt-A, subprime, I-O + +On line 313: + low-doc, no-doc, or + ninja (no income, no job, + no assets) loans; 2–28s + +On line 313: + piggyback second + mortgages; payment-option or + pick-a-pay adjustable + +On line 313: + variants on adjustable-rate + mortgages, called "exploding" ARMs, + featured low monthly + +On line 313: + at first, but payments + could suddenly double or + triple, if borrowers + +On line 313: + of different kinds + of mortgages available on the + market, confounding + +On line 313: + examine the fine + print, baffling conscientious + borrowers who tried + + to puzzle out their + implications, and opening + the door for those who + +On line 315: + in on the action. + Many people chose poorly. Some + people wanted to + + live beyond their means, + and by mid-2005, nearly one-quarter + of all borrowers + +On line 315: + them to defer the + payment of principal.20 Some + borrowers opted + +On line 315: + nontraditional + mortgages because that was the + only way they could + +On line 315: + foothold in areas such + as the sky-high California + housing market.21 Some + +On line 315: + and Georgia became + a particular target + for investors who used + +On line 315: + to acquire real + estate.22 Some were misled by + salespeople who came + +On line 315: + homes and persuaded + them to sign loan documents + on their kitchen tables. + +On line 315: + mortgage brokers who + earned more money placing them + in risky loans than in + + safe ones.23 With these loans, + buyers were able to bid up + the prices of houses + +On line 315: + if they didn’t have + enough income to qualify + for traditional + +On line 317: + these exotic loans + had existed in the past, + used by high-income, + +On line 317: + secure people as + a cash-management tool. Some + had been targeted + +On line 317: + they refinanced. But + the instruments began to + deluge the larger + +On line 317: + and The changed occurred + "almost overnight," Faith Schwartz, then an + executive at + +On line 317: + lender Option One and + later the executive + director of Hope + +On line 317: + "I would suggest most + every lender in the country + is in it, one way + +On line 319: + a lot of people + really understood the + potential hazards + + of these new loans. They + were new, they were different, + and the consequences + + were uncertain. But + it soon became apparent + that what had looked like + +On line 319: + the United States climbed + from trillion in to trillion + in The mortgage debt + +On line 319: + American households + rose almost as much in the + six years from to as + + it had over the course + of the country’s more than 200-year + history. The amount + +On line 319: + per household rose from + in to in With a simple + flourish of a pen + + on paper, millions + of Americans traded away + decades of equity + + tucked away in their homes. + Under the radar, the lending + and the financial + +On line 321: + mutated. In the + past, lenders had avoided making + unsound loans because + + they would be stuck with + them in their loan portfolios. + But because of the + +On line 321: + clear anymore who the + lender was. The mortgages would be + packaged, sliced, repackaged, + +On line 321: + securities to + an assortment of hungry + investors. Now even the + +On line 323: + find a buyer. More + loan sales meant higher profits + for everyone in + +On line 323: + that were expanding + mortgage originations. He + crisscrossed the nation, + +On line 325: + originators a + year in auditoriums + and classrooms. is clients + + included many of + the largest lenders—Countrywide, Ameriquest, and Ditech among + them. Most of their new + + hires were young, with no + mortgage experience, fresh + out of school and with + +On line 327: + "flipping burgers," he + told the FCIC. Given the right + training, however, + +On line 329: + could "easily" earn + millions.26 "I was a sales and + marketing trainer + + in terms of helping + people to know how to sell + these products to, in + +On line 329: + and unsuspecting + borrowers," he said. He taught + them the new playbook: + +On line 329: + to be concerned about + the quality of the loan, + whether it was suitable + + for the borrower + or whether the loan performed. In + fact, you were in a + +On line 329: + encouraged not to + worry about those macro issues." + He added, "I knew that + + the risk was being + shunted off. I knew that we + could be writing crap. + +On line 329: + in the end it was + like a game of musical + chairs. Volume might go + + down but we were not + going to be hurt."27 On Wall + Street, where many of these + +On line 331: + were packaged into + securities and sold to + investors around the globe, + + a new term was coined: + IBGYBG, "I’ll be gone, you’ll + be gone."28 It referred + + to deals that brought in + big fees up front while risking + much larger losses + +On line 331: + the future. And, for + a long time, IBGYBG worked + at every level. + +On line 333: + entered the pipeline + soon after borrowers signed + the documents and + + picked up their keys. Loans + were put into packages and + sold off in bulk to + +On line 333: + banks such as Merrill + Lynch, Bear Stearns, and Lehman Brothers, + and commercial banks + + and thrifts such as Citibank, + Wells Fargo, and Washington + Mutual. The firms + +On line 333: + mostly be stamped with + triple-A ratings by the credit + rating agencies, and + +On line 333: + riskier portions of + these securities—which would then + be sold to other + +On line 333: + would also receive + the coveted triple-A ratings + that investors believed + + attested to their + quality and safety. Some + investors would buy an + + invention from the + 1990s called a credit default + swap (CDS) to protect + +On line 333: + For every buyer + of a credit default swap, + there was a seller: + + as these investors made + opposing bets, the layers + of entanglement + +On line 335: + The instruments grew + more and more complex; CDOs were + constructed out of + +On line 335: + creating CDOs squared. + When firms ran out of real + product, they started + +On line 335: + but just of bets on + other mortgage products. Each + new permutation + +On line 335: + to extract more fees + and trading profits. And each + new layer brought in + +On line 335: + investors wagering + on the mortgage market—even well + after the market + + had started to turn. + So by the time the process was + complete, a mortgage + +On line 335: + in south Florida + might become part of dozens of + securities owned + +On line 335: + Treasury Secretary + Timothy Geithner, + the president of + +On line 335: + crisis, described the + resulting product as "cooked + spaghetti" that became + + hard to "untangle."29 + Ralph Cioffi spent several + years creating CDOs + +On line 337: + and a couple of + more years on the repurchase + or "repo" desk, which + +On line 337: + responsible for + borrowing money every + night to finance Bear + +On line 337: + Cioffi created + a hedge fund within Bear Stearns + with a minimum + +On line 337: + money—up to borrowed + for every from investors—to buy + CDOs. Cioffi’s first fund + +On line 337: + for investors in and + in 2005—after the annual + management fee and + +On line 337: + profit for Cioffi + and his Bear Stearns team—and grew + to almost billion + +On line 337: + of In the fall of + he created another, + more aggressive fund. + +On line 337: + This one would shoot for + leverage of up to to By + the end of the two + +On line 337: + in securities + issued by CDOs centered on + housing. As a CDO + +On line 339: + mortgage-related CDOs + for other investors. Cioffi’s + investors and others + +On line 341: + high-yielding mortgage + securities. That, in turn, + required high-yielding + +On line 341: + borrowers, urging + them to buy or refinance + homes. Direct-mail + +On line 341: + people’s mailboxes.30 + Dancing figures, depicting + happy homeowners, + +On line 341: + hook with calls from loan + officers offering the + latest loan products: + + One percent loan! (But + only for the first year.) No + money down! (Leaving + +On line 341: + if home prices fell.) No + income documentation + needed! (Mortgages soon + +On line 341: + industry itself.) + Borrowers answered the call, + many believing that + + with ever-rising prices, + housing was the investment + that couldn’t lose. In + +On line 343: + four intermingled + issues came into play that + made it difficult + + to acknowledge the + looming threats. First, efforts to + boost homeownership + +On line 343: + broad political + support—from Presidents Bill + Clinton and George W. + + Bush and successive + Congresses—even though in + reality the + +On line 343: + the spring of Second, + the real estate boom was + generating a + +On line 343: + of cash on Wall Street + and creating a lot of + jobs in the housing + +On line 343: + believed that even if + the housing market tanked, the + broader financial + +On line 345: + would hold up. As the + mortgage market began its + transformation in + + the late 1990s, consumer + advocates and front-line + local government + +On line 345: + among the first to spot + the changes: homeowners began + streaming into their + + offices to seek help + in dealing with mortgages they + could not afford to + +On line 345: + began raising the + issue with the Federal + Reserve and other + +On line 345: + general counsel + and policy director + of the Greenlining + +On line 345: + California-based + nonprofit housing group, told + the Commission that + +On line 345: + he began meeting + with Greenspan at least once a year + starting in each time + +On line 345: + to him the growth of + predatory lending practices + and discussing with him + +On line 347: + economic problems + they were creating.32 One of + the first places to see + +On line 347: + an entire market + was Cleveland, Ohio. From to home + prices in Cleveland rose + +On line 349: + median of to + while home prices nationally + rose about in those same + +On line 349: + years; at the same time, + the city’s unemployment rate, + ranging rom in to + +On line 351: + more or less tracked the + broader U.S. pattern. James Rokakis, + the longtime county + +On line 351: + of Cuyahoga County, + where Cleveland is located, + told the Commission + +On line 351: + the region’s housing + market was juiced by "flipping + on mega-steroids," with rings + +On line 351: + appraisers, and loan + originators earning fees + on each transaction + +On line 353: + Street. City officials + began to hear reports that + these activities + +On line 353: + propelled by new kinds + of nontraditional loans + that enabled investors + +On line 353: + buy properties with + little or no money down + and gave homeowners + +On line 353: + to refinance their + houses, regardless of whether + they could afford to + +On line 353: + the loans. Foreclosures + shot up in Cuyahoga County + from a year in to + +On line 353: + a year in Rokakis and + other public officials + watched as families + + who had lived for years + in modest residences lost + their homes. After they + +On line 353: + were ultimately + abandoned, vandalized, and then + stripped bare, as scavengers + +On line 355: + siding to sell for + scrap. "Securitization + was one of the most + + brilliant financial + innovations of the 20th + century," Rokakis told + +On line 355: + Commission. "It freed + up a lot of capital. + If it had been done + + responsibly, it + would have been a wondrous thing + because nothing is + +On line 357: + nothing safer, than the + American mortgage market. + It worked for years. But + +On line 359: + scam it."34 Officials + in Cleveland and other Ohio + cities reached out to the + +On line 359: + for help. They asked the + Federal Reserve, the one + entity with the + +On line 359: + risky lending practices + by all mortgage lenders, to use + the power it had + +On line 359: + in under the Home + Ownership and Equity + Protection Act (HOEPA) + +On line 359: + new mortgage lending + rules. In March Fed Governor + Edward Gramlich, an + +On line 359: + access to credit + but only with safeguards in + place, attended a + + conference on the + topic in Cleveland. He spoke + about the Fed’s power + +On line 359: + HOEPA, declared some of + the lending practices to be + "clearly illegal," + +On line 363: + enforcement measures."35 + Looking back, Rokakis remarked to + the Commission, "I + + naively believed they’d + go back and tell Mr. Greenspan and + presto, we’d have some new + +On line 363: + rules. I thought it would + result in action being + taken. It was kind + +On line 365: + Cleveland was looking + for help from the federal + government, other + +On line 365: + around the country were + doing the same. John Taylor, + the president of + +On line 365: + of community + leaders from Nevada, Michigan, + Maryland, Delaware, + +On line 365: + New Jersey, and Ohio, + went to the Office of Thrift + Supervision (OTS), + +On line 365: + loan institutions, + asking the agency to crack + down on what they called + +On line 367: + believed were putting both + borrowers and lenders at risk.37 + The California + +On line 367: + group based in Northern + California, also begged + regulators to + +On line 367: + officials told the + Commission. The nonprofit + group had reviewed the + +On line 367: + and discovered that + many individuals were + being placed into + + high-cost loans when + they qualified for better + mortgages and that many + + had been misled about + the terms of their loans.38 There were + government reports, + +On line 371: + Treasury Department + issued a joint report on + predatory lending + +On line 371: + that made a number + of recommendations for + reducing the risks + +On line 371: + to borrowers.39 In + December the Federal + Reserve Board used the + + HOEPA law to amend some + regulations; among the changes + were new rules aimed at + +On line 371: + refinancings over + a short period of time, + if they were not in + + the borrower’s best + interest.40 As it would turn + out, those rules covered + +On line 371: + only of subprime + loans. FDIC Chairman Sheila C. Bair, + then an assistant + + treasury secretary + in the administration + of President George + +On line 371: + Bush, characterized + the action to the FCIC as + addressing only + +On line 371: + a "narrow range of + predatory lending issues."41 + In Gramlich noted + +On line 371: + "increasing reports + of abusive, unethical + and in some cases, + +On line 373: + lending practices."42 Bair + told the Commission that this + was when "really + +On line 373: + on traditional + banks to follow suit.43 She said + that she and Gramlich + + considered seeking + rules to rein in the growth of + these kinds of loans, but + + Gramlich told her that + he thought the Fed, despite its + broad powers in this + + area, would not support + the effort. Instead, they sought + voluntary rules for + +On line 375: + but that effort fell + by the wayside as well.44 In + an environment + +On line 375: + standards declined. The + companies issuing these + loans made profits that + +On line 377: + rose sharply. In the top + nonprime lenders originated + billion in loans. Their + +On line 379: + billion in and then + billion in California, + with its high housing + +On line 379: + kind of lending. In + nearly billion, or of all + nontraditional + +On line 379: + nationwide, were made + in that state; California’s + share rose to by with + +On line 379: + growing to billion + or by in California + in just two years.46 In + +On line 379: + director of the + California Reinvestment + Coalition, testified + +On line 379: + the Commission. "We + estimated at that time + that the average + +On line 379: + California was + paying over more per month on + their mortgage payment + +On line 381: + result of having + received the subprime loan."47 Gail + Burks, president and + +On line 381: + Nevada Fair Housing, + Inc., a Las Vegas–based + housing clinic, told + +On line 381: + Commission she and + other groups took their concerns + directly to Greenspan + +On line 383: + time, describing to + him in person what she called + the "metamorphosis" + +On line 383: + industry. She told + him that besides predatory + lending practices such + + as flipping loans or + misinforming seniors about + reverse mortgages, she + +On line 385: + accounts.48 Lisa Madigan, + the attorney general + in Illinois, also + +On line 385: + Consumers complained that + they had been deceived into + taking out loans with + +On line 387: + fees. The company + was then packaging the loans + and selling them as + + securities to + Lehman Brothers, Madigan said. The + case was settled in + +On line 387: + received million. First + Alliance went out of business. + But other firms stepped + +On line 389: + to investigate + another fast-growing lender, + California-based + +On line 389: + nation’s largest subprime + lender, originating billion + in subprime loans in + + 2003—mostly refinances + that let borrowers take cash + out of their homes, but + +On line 391: + hefty fees that ate away + at their equity.50 Madigan + testified to the + +On line 391: + Ameriquest revealed that the + company engaged in the + kinds of fraudulent + +On line 391: + lenders subsequently + emulated on a wide + scale: inflating home + +On line 391: + interest rates on + borrowers’ loans or switching + their loans from fixed to + + adjustable interest + rates at closing; and promising + borrowers that they + + could refinance their + costly loans into loans with + better terms in just + + a few months or a + year, even when borrowers had + no equity to + + absorb another + refinance."51 Ed Parker, the + former head of Ameriquest’s + +On line 393: + the Commission that + he detected fraud at the + company within + +On line 393: + month of starting his + job there in January but + senior management + + did nothing with the + reports he sent. He heard that + other departments + +On line 395: + were complaining he + "looked too much" into the loans. + In November he + +On line 399: + from "manager" to + "supervisor," and was laid + off in May In late + +On line 399: + its loans. He received + about boxes of documents. + He pulled one file at + + random, and stared at + it. He pulled out another + and another. He + + noted file after + file where the borrowers were + described as "an-tiques + +On line 399: + he recalled in an + interview with the FCIC, a + disabled borrower + +On line 399: + his 80s who used a + walker was described in the + loan application + +On line 403: + being employed in + "light construction."53 "It didn’t + take Sherlock Holmes to + +On line 403: + out this was bogus," + Cox told the Commission. As + he tried to figure + +On line 403: + suggested that he + "look upstream." Cox suddenly + realized that the + +On line 405: + product to ship to + Wall Street to sell to investors. + "I got that it had + +On line 407: + "The lending pattern + had shifted."54 Ultimately, + states and the District + + of Columbia joined + in the lawsuit against Ameriquest, on + behalf of "more than + +On line 407: + million settlement. + But during the years when the + investigation + +On line 409: + way, between and Ameriquest + originated another + billion in loans,55 which + +On line 411: + investigation, + some federal officials + said they had followed + +On line 411: + Housing and Urban + Development, "we began + to get rumors" that + +On line 411: + firms were "running wild, + taking applications over + the Internet, not + +On line 411: + peoples’ income or + their ability to have a + job," recalled Alphonso + +On line 413: + the HUD secretary + from to in an interview + with the Commission. + +On line 413: + great deal of money + and there wasn’t a great deal + of oversight going + +On line 413: + he was the nation’s + top housing official at + the time, he placed much + +On line 415: + the blame on Congress.56 + Cox, the former Minnesota + prosecutor, and + + Madigan, the Illinois + attorney general, told + the Commission that + +On line 415: + the single biggest + obstacles to effective + state regulation + +On line 415: + chartered banks—including + Bank of America, Citibank, and + Wachovia—and the OTS, + +On line 415: + thrifts. The OCC and OTS + issued rules preempting states + from enforcing rules + +On line 417: + national banks and + thrifts.57 Cox recalled that in Julie + Williams, the chief counsel + +On line 419: + OCC, had delivered + what he called a "lecture" to + the states’ attorneys + +On line 419: + in a meeting in + Washington, warning them that + the OCC would "quash" them + + if they persisted + in attempting to control + the consumer practices + +On line 421: + institutions.58 Two + former OCC comptrollers, John + Hawke and John Dugan, told + +On line 421: + Commission that they + were defending the agency’s + constitutional + +On line 421: + entities. Because + state-chartered lenders had more lending + problems, they said, the + +On line 421: + to involve themselves + in federally chartered + institutions, an + +On line 421: + told the Commission + that national banks funded + of the largest subprime + +On line 421: + operating with + state charters, and that those banks + were the end market + +On line 421: + by the state-chartered firms. + She noted that the OCC was + "particularly + +On line 421: + in its efforts to + thwart state authority over + national lenders, and + + lax in its efforts + to protect consumers from the + coming crisis."60 Many + +On line 423: + in enforcing their + own lending regulations, + as did some cities. In + +On line 423: + Carolina–based Wachovia + Bank told state regulators + that it would not abide + + by state laws, because + it was a national bank + and fell under the + +On line 423: + Wachovia’s announcement, + and Wachovia sued Michigan. The + OCC, the American + +On line 423: + and the Mortgage Bankers + Association entered + the fray on Wachovia’s + +On line 423: + and the District of + Columbia aligned themselves with + Michigan. The legal + +On line 423: + four years. The Supreme Court + ruled in Wachovia’s favor on + April leaving the OCC + +On line 423: + were they negligent, + they were aggressive players + attempting to stop + +On line 425: + enforcement action[s]. + Those guys should have been on our + side."61 Nonprime lending + +On line 425: + surged to billion in + and then trillion in and its + impact began to + + be felt in more and + more places.62 Many of those loans were + funneled into the + + pipeline by mortgage + brokers—the link between + borrowers and the + +On line 425: + financed the mortgages—who + prepared the paperwork for + loans and earned fees from + +On line 425: + lenders for doing it. + More than new mortgage brokers + egan their jobs during + +On line 425: + than honorable in + their dealings with borrowers.63 + According to an + +On line 425: + investigative news + report published in between + and at least people + +On line 425: + entered the field in + Florida, for example, + including who had + +On line 425: + been convicted of + such crimes as fraud, bank robbery, + racketeering, and + + extortion.64 J. Thomas + Cardwell, the commissioner + of the Florida + +On line 425: + accountability + created a condition + in which fraud flourished."65 + +On line 425: + Association + of Mortgage Brokers, told the + Commission that while + + most mortgage brokers + looked out for borrowers’ best + interests and steered + +On line 425: + them away from risky loans, + about of the newcomers to + the field nationwide + +On line 425: + to do whatever + it took to maximize the + number of loans they + +On line 427: + home values grew even + faster between and the real + estate appraiser + +On line 427: + initially felt pride + that his birthplace, miles north of + Los Angeles, "had + +On line 427: + been discovered" by + other Californians. + The city, a farming + +On line 427: + industry center + in the San Joaquin Valley, was + drawing national + + attention for the + pace of its development. + Wide-open farm fields were plowed + +On line 429: + into thousands of + building lots. Home prices jumped in + Bakersfield in in + +On line 431: + more in Crabtree, an + appraiser for years, started + in and to think that + +On line 431: + making sense. People + were paying inflated prices + for their homes, and they + + didn’t seem to have + enough income to pay for what + they had bought. Within + + a few years, when he + passed some of these same houses, + he saw that they were + + vacant. "For sale" signs + appeared on the front lawns. And + when he passed again, the + + yards were untended + and the grass was turning brown. + Next, the houses went + + into foreclosure, + and that’s when he noticed that + the empty houses + +On line 433: + the new suburban + subdivisions. The Cleveland + phenomenon had + +On line 433: + Bakersfield, a place + far from the Rust Belt. Crabtree + watched as foreclosures + +On line 433: + Houses fell into + disrepair and neighborhoods + disintegrated. + +On line 435: + began studying the + market. In he ended up + identifying what + +On line 435: + in Bakersfield; some, + for instance, were allowing + insiders to siphon + +On line 435: + property transfer. + The transactions involved many + of the nation’s largest + +On line 435: + for example, was + listed for sale for and was + recorded as selling + +On line 435: + for with financing, + though the real estate agent + told Crabtree that it + +On line 435: + actually sold + for Crabtree realized that + the gap between the + +On line 435: + sales price and loan amount + allowed these insiders to + pocket The terms of + +On line 435: + The house went into + foreclosure and was sold in + a distress sale for + +On line 437: + began calling lenders + to tell them what he had found; + but to his shock, they + +On line 437: + reached one quality + assurance officer at + Fremont Investment + +On line 437: + nation’s eighth-largest subprime + lender. "Don’t put your nose where it + doesn’t belong," he + +On line 439: + story to state law + enforcement officials and + to the Federal + +On line 439: + Investigation. + "I was screaming at the top + of my lungs," he said. + +On line 439: + pace of enforcement + and at prosecutors’ lack + of response to a + +On line 441: + wreaking economic + havoc in Bakersfield.69 At + the Washington, D.C., + +On line 441: + the FBI, Chris Swecker, + an assistant director, + was also trying + +On line 441: + to pay attention + to mortgage fraud. "It has the + potential to be + + an epidemic," he + said at a news conference + in Washington in + +On line 441: + think we can prevent + a problem that could have as + much impact as the + +On line 443: + crisis."70 Swecker called + another news conference + in December to + +On line 443: + the same thing, this time + adding that mortgage fraud was a + "pervasive problem" + + that was "on the rise." + He was joined by officials + from HUD, the U.S. Postal + +On line 443: + Internal Revenue + Service. The officials told + reporters that real + +On line 443: + executives were + not doing enough to root out + mortgage fraud and that + +On line 445: + do more to "police + their own organizations."71 + Meanwhile, the number + +On line 447: + continued to swell. + Suspicious activity + reports, also known + +On line 447: + are reports filed by + banks to the Financial Crimes + Enforcement Network + +On line 447: + within the Treasury + Department. In November + the network published + +On line 447: + analysis that found + a 20-fold increase in mortgage + fraud reports between + +On line 447: + underreporting, + because two-thirds of all the loans + being created + + were originated + by mortgage brokers who were + not subject to any + +On line 447: + addition, many lenders + who were required to submit + reports did not in + + fact do so.73 "The claim + that no one could have foreseen + the crisis is false," + + said William K. Black, an + expert on white-collar crime + and a former staff + +On line 451: + Reform, Recovery + and Enforcement, created + by Congress in as + +On line 455: + served from February + to told the FCIC he could not + remember the press + + conferences or news + reports about mortgage fraud. Both + Gonzales and his + +On line 455: + Michael Mukasey, who served as + attorney general in + and told the FCIC that + +On line 455: + to them as a top + priority. "National + security was + +On line 457: + overriding" concern, + Mukasey said.75 To community + activists and local + +On line 457: + lending practices were + a matter of national + economic concern. + +On line 457: + the Empire Justice + Center in Rochester, New York, told + Fed Governors Bernanke, + +On line 457: + Susan Bies, and Roger + Ferguson in October + that she suspected + +On line 457: + and Lehman Brothers—were + producing such bad loans that + the very survival of + + the firms was put in + question. "We repeatedly + see false appraisals and + +On line 457: + Fed officials, who + were gathered at the public + hearing period + +On line 457: + She urged the Fed to + prod the Securities and + Exchange Commission + + to examine the + uality of the firms’ due + diligence; otherwise, + + she said, serious + questions could arise about whether they + could be forced to buy + + back bad loans that they + had made or securitized.76 + Maker told the board + +On line 459: + from a confluence + of financial events: flat or + declining incomes, + +On line 461: + and fraudulent loans + with overstated values.77 In + an interview with + +On line 461: + Fed officials seemed + impervious to what the + consumer advocates + +On line 461: + The Fed governors + politely listened and said + little, she recalled. + +On line 461: + had their economic + models, and their economic + models did not see + + this coming," she said. + "We kept getting back, ‘This is + all anecdotal.’"78 Soon + + nontraditional + mortgages were crowding other + kinds of products out + + of the market in + many parts of the country. More + mortgage borrowers + +On line 463: + out interest-only + loans, and the trend was far more + pronounced on the West + +On line 463: + of their easy credit + terms, nontraditional loans + enabled borrowers + +On line 463: + buy more expensive + homes and ratchet up the prices + in bidding wars. The + +On line 463: + pattern of higher + foreclosure rates frequently + appeared soon after. + + As home prices shot up + in much of the country, many + observers began to + +On line 465: + June the Economist + magazine’s cover story + posited that the day + + of reckoning was + at hand, with the headline "House + Prices: After the Fall." + +On line 465: + depicted a brick + plummeting out of the sky. + "It is not going + + to be pretty," the + article declared. "How the + current housing boom + +On line 465: + decide the course of + the entire world economy + over the next few years."80 + +On line 467: + month, Fed Chairman Greenspan + acknowledged the issue, telling + the Joint Economic + +On line 467: + of the U.S. Congress + that "the apparent froth in + housing markets may + +On line 467: + spilled over into the + mortgage markets."81 For years, he + had warned that Fannie + +On line 467: + Freddie Mac, bolstered + by investors’ belief that these + institutions had + +On line 467: + backing of the U.S. + government, were growing so + large, with so little + +On line 467: + for the financial + system. Still, he reassured + legislators that + + the U.S. economy + was on a "reasonably firm + footing" and that the + +On line 469: + be resilient if the + housing market turned sour. "The + dramatic increase + +On line 469: + the introduction + of other relatively + exotic forms of + +On line 469: + are developments + of particular concern," + he testified in + + June. To be sure, these + financing vehicles have + their appropriate + + uses. But to the + extent that some households may + be employing these + +On line 471: + that would otherwise + be unaffordable, their use + is beginning to + +On line 473: + to the pressures in + the marketplace. Although we + certainly cannot + +On line 473: + local markets, these + declines, were they to occur, + likely would not have + +On line 473: + banking and widespread + securitization of + mortgages makes it less + +On line 473: + would be impaired than + was the case in prior episodes + of regional house + +On line 475: + corrections.82 Indeed, + Greenspan would not be the only + one confident that + +On line 475: + downturn would leave the + broader financial system + largely unscathed. As + +On line 475: + after housing prices + had been declining for a + year, Bernanke testified + +On line 477: + "the problems in the + subprime market were likely + to be contained"—that is, + +On line 479: + economy.83 Some were + less sanguine. For example, + the consumer lawyer Sheila + +On line 481: + interest-only, a + proportion that was more than + twice the national + +On line 481: + "That’s insanity," + she told the Fed governors. + "That means we’re facing + + something down the road + that we haven’t faced before and + we are going to + + be looking at a + safety and soundness crisis."84 + On another front, + + some academics offered + pointed analyses as they raised + alarms. For example, + +On line 485: + the Yale professor + Robert Shiller, who along with Karl Case + developed the Case-Shiller + +On line 487: + the market appeared + in historical terms. Shiller + warned that the housing + +On line 489: + would likely burst.85 In + that same month, a conclave of + economists gathered + + at Jackson Lake Lodge + in Wyoming, in a conference + center nestled in + + Grand Teton National + Park. It was a "who’s who of + central bankers," recalled + +On line 491: + who was then on leave + from the University of + Chicago’s business school + +On line 491: + the chief economist + of the International + Monetary Fund. Greenspan + + was there, and so was + Bernanke. Jean-Claude Trichet, the president + of the European + + Central Bank, and Mervyn + King, the governor of the + Bank of England, were + +On line 495: + dignitaries.86 Rajan + presented a paper with + a provocative title: + +On line 495: + Development Made + the World Riskier1" He posited + that executives + +On line 495: + let off the hook for + any eventual losses—the + IBGYBG syn-drome. + +On line 495: + investment strategies + such as credit default swaps + could have disastrous + +On line 495: + became unstable, + and that regulatory + institutions might + + be unable to deal + with the fallout.87 He recalled + to the FCIC that he + + was treated with scorn. + Lawrence Summers, a former U.S. + treasury secretary + +On line 497: + then president of + Harvard University, called + Rajan a "Luddite," + +On line 497: + simply opposed to + technological change.88 "I + felt like an early + +On line 497: + had wandered into + a convention of half-starved + lions," Rajan wrote + +On line 499: + University of + Pennsylvania’s Wharton School, + prepared a research + +On line 499: + that the United States + could have a real estate + crisis similar + +On line 501: + suffered in Asia in + the 1990s. When she discussed her + work at another + +On line 501: + Hole gathering two + years later, it received a + chilly reception, she + +On line 501: + Commission. "It was + universally panned," she said, + and an economist + +On line 505: + were beginning to + highlight indications that + the real estate + +On line 505: + was weakening. Home + sales began to drop, and Fitch + Ratings reported + +On line 505: + mortgage delinquencies + were rising. That year, the hedge + fund manager Mark + +On line 505: + securities trade + group, that investors had become + "over optimistic" about + +On line 505: + market. "I see a + lot of irrationality," + he added. He said he + +On line 505: + different this time"—a + rationale commonly heard + before previous + +On line 507: + Some real estate + appraisers had also been + expressing concerns + +On line 509: + to a coalition of + appraisal organizations + circulated and + +On line 509: + petition; signed by + appraisers and including + the name and address + +On line 509: + assigning business + only to appraisers who + would hit the desired + +On line 509: + "The powers that be + cannot claim ignorance," the + appraiser Dennis + +On line 511: + Black of Port Charlotte, + Florida, testified to + the Commission.92 The + +On line 511: + veteran, told the + Commission that lenders had opened + subsidiaries to perform + +On line 511: + consumers and making + it easier to inflate + home values. The steep + +On line 511: + the un-merited and + inflated appraisals she was + seeing in Northern + +On line 511: + was headed for a + cataclysmic downturn. In she + laid off some of her + +On line 511: + in order to cut + her overhead expenses, in + anticipation + +On line 511: + the coming storm; two + years later, she shut down her + office and began + + working out of her + home.93 Despite all the signs that + the housing market + +On line 513: + slowing, Wall Street just + kept going and going—ordering + up loans, packaging + +On line 513: + By the third quarter + of home prices were falling and + mortgage delinquencies + +On line 513: + a combination + that spelled trouble for mortgage-backed + securities. But + +On line 513: + from the third quarter + of on, banks created and + sold some trillion in + +On line 515: + and more than billion + in mortgage-related CDOs.94 Not + everyone on Wall + +On line 515: + were urging caution, + as corporate governance + and risk management + +On line 517: + down. Reflecting on + the causes of the crisis, + Jamie Dimon, CEO of + +On line 517: + testified to the + FCIC, "I blame the management + teams and no one else."95 + +On line 519: + too many financial + firms, management brushed aside the + growing risks to their + +On line 519: + At Lehman Brothers, for + example, Michael Gelband, the + head of fixed income, + +On line 519: + his colleague Madelyn + Antoncic warned against taking + on too much risk in + +On line 519: + growing pressure to + compete aggressively against + other investment + +On line 519: + Antoncic, who was + the firm’s chief risk officer + from to was shunted + + aside: "At the senior + level, they were trying to + push so hard that the + + wheels started to come + off," she told the Commission. + She was reassigned + +On line 523: + on "philosophical + differences."97 At Citigroup, + meanwhile, Richard Bowen, a + +On line 523: + the consumer lending + group, received a promotion + in early when he + + was named business chief + under writer. He would go + on to oversee loan + +On line 523: + quality for over + billion a year of mortgages + underwritten and + + purchased by CitiFinancial. These + mortgages were sold to Fannie + Mae, Freddie Mac, and + +On line 523: + others. In June Bowen + discovered that as much as + of the loans that Citi + +On line 525: + meet Citi - group’s loan + guidelines and thus endangered + the company—if the + +On line 525: + were to default on + their loans, the investors could force + Citi to buy them back. + +On line 525: + the Commission that + he tried to alert top managers + at the firm by "email, + +On line 527: + and discussions"; but + though they expressed concern, it + "never translated + + into any action." + Instead, he said, "there was a + considerable push + +On line 527: + to increase market + share." Indeed, Bowen recalled, Citi + began to loosen its + +On line 527: + started to purchase + stated-income loans. "So we joined + the other lemmings + +On line 529: + for the cliff," he said + in an interview with the + FCIC.98 He finally + +On line 529: + his warnings to the + highest level he could reach—Robert + Rubin, the chairman + +On line 529: + the Executive + Committee of the Board of + Directors and a + + former U.S. treasury + secretary in the Clinton + administration, + + and three other bank + officials. He sent Rubin + and the others a + +On line 531: + the words "URGENT—READ + IMMEDIATELY" in the + subject line. Sharing + + his concerns, he stressed + to top managers that Citi faced + billions of dollars + +On line 531: + if investors were to + demand that Citi repurchase + the defective loans.99 + +On line 533: + told the Commission + in a public hearing in + April that Citibank handled + +On line 533: + Bowen matter promptly + and effectively. "I do + recollect this and + + that either I or + somebody else, and I truly + do not remember + + who, but either I + or somebody else sent it to + the appropriate + +On line 533: + that that was acted + on promptly and actions were + taken in response + +On line 533: + the bank undertook + an investigation in + response to Bowen’s claims + + and the system of + underwriting reviews was + revised.101 Bowen told the + +On line 535: + sending emails, he went + from supervising0 people + to supervising + +On line 535: + bonus was reduced, and + he was downgraded in his + performance review.102 + +On line 539: + a former Bear Stearns + executive, testified + to the FCIC that he + +On line 539: + to be on a shaky +