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The Bad Guys of Subprime Lending Are Raking in Bailout Billions

Naming the top 25 lenders and their Wall Street backers that juiced the subprime industry.

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Bailout Recipients

President George W. Bush signs the Emergency Economic Stabilization Act of 2008 in the Oval Office. (White House/Eric Draper) On Oct. 3, 2008, former President Bush signed the $700 billion Emergency Economic Stabilization Act of 2008 into law. The legislation created the "Troubled Asset Relief Program" -- or TARP, as it is known -- to buy up mortgage-backed securities and hold them, ideally, until they recovered some of their value and could be auctioned. By removing the so-called "toxic" assets from the banks' balance sheets, it was hoped they would begin lending again. The administration later changed direction and opted instead to buy shares of stock from the banks.

In addition to the $700 billion bailout, the Federal Reserve began committing hundreds of billions of dollars to guarantee against losses on failing mortgage assets of AIG, Citigroup, and Bank of America.

Among the lenders on the Center top 25 list, seven have received government assistance. Citigroup has collected $25 billion through the TARP program, $20 billion through the Treasury Department's "targeted investment program," and a $5 billion Treasury backstop on asset losses. It has also been guaranteed protection from losses on $306 billion in assets. Wells Fargo has collected $25 billion in TARP funds, and Bank of America, which bought Countrywide and Merrill Lynch before their imminent collapse, received another $45 billion in TARP money. Also on the list: JPMorgan Chase (owner of Chase Home Mortgage), Regions Financial Corp. (former owner of EquiFirst), GMAC/Cerberus Capital Management, and Capital One Financial Corp. (former owner of GreenPoint Mortgage). And the bailout of insurance giant AIG may go as high as $187 billion and includes a combination of loans, direct investment by the government, and purchases of shaky assets.

Center researchers attempted to reach every CEO and corporate owner on its list of the top 25 lenders with mixed success.

A call and e-mail to Bank of America were not returned. A Wells Fargo spokesman said the bank carefully reviews a borrower's ability to pay. "That's why 93 out of every 100 of our mortgage customers were current on their payments at the end of 2008," the bank's Kevin Waetke wrote in an e-mail.

Capital One spokeswoman Tatiana Stead responded that GreenPoint's loans were considered Alt-A, which generally do not require documentation of income but whose borrowers have good credit. Such loans are not considered subprime, she said, and added that the bank closed GreenPoint shortly after it was acquired.

Since the confusion and panic of 2008 has receded, angry taxpayers have been looking for someone to blame for the mess. Subprime lenders that originated loans they knew were likely to fail are widely cited as a good place to start. But the subprime lenders could never have done so much damage were it not for their underwriters -- those giant investment banks in the U.S., Germany, Switzerland, and England.

Wall Street Cash Pours In

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

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

When New Century filed for bankruptcy, it listed Goldman Sachs Mortgage Co. as one of the 50 largest unsecured creditors. Other New Century creditors include Bank of America, Morgan Stanley, Citigroup, Barclays, and Swiss bank UBS.

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