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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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New Century earlier reported to its shareholders that it had lines of credit totaling $14.1 billion from those five banks, plus Bear Stearns, Credit Suisse First Boston, Deutsche Bank, and IXIS Real Estate Capital, a French banking firm (since taken over by a company called Natixis) that frequently worked with Morgan Stanley.

An investigative report prepared for the U.S. Trustee overseeing the bankruptcy case described a "brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy" at New Century. It said the company made loans "in an aggressive manner that elevated the risks to dangerous and ultimately fatal levels."

In December 2006, Citigroup pooled $492 million-worth of mortgages to sell to investors as securities, one of several major offerings the bank had packaged for Wall Street. Sixty-three percent of the mortgages were originated by New Century, according to the lengthy prospectus. Eighty-one percent of the loans were adjustable rate mortgages.

Despite their massive investment in subprime loans, some of the nation's most powerful bankers continue to deflect responsibility.

"Demonizing the bankers as if they and they alone created the financial meltdown is both inaccurate and short-sighted," Citigroup chairman Richard Parsons told reporters recently. "Everybody participated in pumping up this balloon and now that the balloon has deflated, everybody in reality has some part in the blame."

A lawyer for former New Century CEO Robert K. Cole said he would have no comment.

Attorney Bert H. Deixler, who represents another former New Century CEO, Brad Morrice, was reached by e-mail. He was asked to comment on New Century's ranking as well as the contention that subprime loans originated by banks like New Century led to the collapse of the financial industry. Deixler described the Center's conclusions as "ludicrous." Several calls and e-mails asking him to elaborate were not returned.

Ameriquest, according to Center research of prospectuses, had relationships with virtually every major Wall Street investment bank. The lender sold billions of dollars in loans to Lehman Brothers, Bear Stearns, Goldman Sachs, Citigroup and Merrill Lynch. Some of its other financial supporters included Morgan Stanley, JPMorgan Chase, Deutsche Bank, UBS Securities, RBS Greenwich Capital, Credit Suisse First Boston, and Bank of America.

Countrywide, in addition to capital from shareholders, also had credit agreements with Bank of America, JP Morgan Chase, Citicorp USA (part of Citigroup), Royal Bank of Canada, Barclays, and Deutsche Bank.

Some investment banks owned subprime lenders. Merrill Lynch bought First Franklin Corp. (No. 4 on the Center list) in late December 2006 for $1.3 billion -- just before the bottom fell out of the market. Bear Stearns bought Encore Credit Corp. in February 2007.

The British banking giant HSBC got into the U.S. mortgage business in a big way when it bought Household International in 2003. It also purchased Arizona-based DecisionOne Mortgage, and operated under the Beneficial and HLC brands. An HSBC spokeswoman said HSBC Finance was primarily a portfolio lender, meaning it did not sell mortgages to third parties. HSBC, however, did package loans from its subprime subsidiaries into securities, according to SEC filings.

Lehman Brothers, now bankrupt, ranked No. 11 on the subprime list. The bank was a pioneer of sorts in investing in subprime lending. It owned several subprime lenders, including BNC Mortgage, Finance America, and Aurora Loan Services LLC.

Even banks that managed to dodge much of the carnage created by the subprime meltdown -- like Goldman Sachs -- were invested in the subprime mortgage business. Goldman in May 2005 submitted a prospectus so that it could sell more than $425 million in securities known as "mortgage pass-through certificates."

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