Chain of Blame

News Updates

Chain of Blame chronicles the subprime meltdown from its inception until the book went to press in early June of 2008. Alas, the crisis continues. These are some key events that happened recently:

March 23, 2009 -- The Treasury Department on Monday unveiled two separate programs for the removal of more than $500 billion in toxic private-label mortgage-backed securities and bad real estate loans from the balance sheets of financial institutions. Both initiatives involve the participation of private investors willing to partner with the federal government, which is putting up financing and 50% of the capital for the these public-private partnerships. Under the new effort, federally insured depositories can sell troubled real estate loans into pools that the Federal Deposit Insurance Corp. will auction off to the private investors. Treasury and private capital will provide equity financing and the FDIC will provide guaranteed debt financing issued by the public-private investment funds. The second program is designed to remove formally AAA-rated residential and commercial MBS from the balance sheets of banks and other financial institutions. However, Treasury and the Federal Reserve Board are still working the details of this program which will provide non-recourse loans to investors willing to purchase these "legacy securities" and employ a long-term buy and hold strategy. "Haircuts will be determined at a later date and will reflect the riskiness of the assets provided as collateral. Lending rates, minimum loan sizes and loan duration have not yet been determined. Asset managers selected by the Treasury and FDIC will oversee the public-private investment funds. --National Mortgage News
October 25, 2008 -- A handful of banks announce they will sell $25 billion of preferred stock and warrants to the Treasury Department as part of the "Troubled Asset Relief Program" which means these lenders have been partially "nationalized" by Uncle Sam. The latest round of banks giving ownership stakes to the Treasury include: Capital One Financial Corp., and SunTrust Banks. The TARP program was made operational by the $700 billion capital markets/mortgage bailout bill signed into law by President Bush in early October.
October 21, 2008 -- Led by the ranking minority member on the House Financial Services Committee, 28 Republican members of Congress ask the Justice Department to include Fannie Mae and Freddie Mac in their targeted probe into mortgage fraud. The 28 also want to know if the government is looking into the 'Friends of Angelo' program where certain elected officials, past and present GSE employees, and others, received breaks on mortgages that were funded by Countrywide Home Loans, the brainchild of Angelo Mozilo, a central character in "Chain of Blame."
October 6, 2008 -- Bank of America saw its credit losses more than double to $6.45 billion in the third quarter, blaming the carnage on delinquent home mortgages. America's largest bank -- whose results now include Angelo Mozilo's Countrywide (a key player in "Chain of Blame") -- saw its portfolio of non-performing loans increase 300% to $13.36 billion. Thanks again to Countrywide.
October 3, 2008 -- President Bush signs a $700 billion bailout bill for the credit and mortgage markets. It is the largest bailout in U.S. history, bar none. The bill, passed by the House of Representatives earlier in the day, gives the Treasury the power to buy subprime mortgages and bonds from any financial institution in the land. To assure passage, members of Congress gave away plenty of "pork" to certain legislators' districts. Here's a small sample: tax breaks for energy that comes from "marine renewables," a plug-in car tax credit, a break on rum excise taxes, an exemption from excise taxes for certain wooden arrows designed for use by children -- and the list goes on and on.
September 29, 2008 -- In a stunning vote that shocked the capital and worldwide markets, the House of Representatives -- led by angry Republicans -- shot down Treasury secretary Henry Paulson's plan to use $700 billion in taxpayer money to buy ailing mortgage assets from financial institutions. Republicans and Democrats immediately go back to work on a compromise plan.
September 29, 2008 -- Equipped with federal guarantees that cover delinquent payment option ARMs (also known as the "I'll cry tomorrow mortgage"), Citigroup buys Wachovia's banking empire, including its residential lending units. By agreeing to buy Wachovia, Citigroup will absorb the first $42 billion in losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Wachovia entered the POA market by purchasing Herb and Marion Sandler's World Savings. POAs allow consumers four different payment options including "neg am" where they actually add to the debt they owe the lender.
September 25, 2008 -- Federal regulators close the nation's largest thrift -- Washington Mutual, once a huge player in subprime -- and then immediately sell it to JPMorgan Chase & Co. The deal will cost JPMorgan Chase $1.9 billion. JPM says in a statement it plans to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase acquired Bear Stearns in March. Bear was a key player in the subprime crisis and is featured in "Chain of Blame."
September 18, 2008 -- Rumors swirl in the marketplace that JPMorgan Chase will buy Washington Mutual, the nation's largest thrift, which suffered huge losses because of subprime loans and payment option ARMs. WaMu, according to 'Chain of Blame,' got burned by purchasing Long Beach Mortgage, a subprime firm formerly owned by Roland Arnall, a huge financial backer (donations) of George W. Bush. (Besides LBM, WaMu had other problems as well.)
September 17, 2008 -- The government bails out American International Group, the nation's largest insurer, which had financed "bets" against subprime bonds in the form of 'credit default swaps.' AIG's exposure on these bets: $70 billion. Credit default swaps are mentioned on page 6 of 'Chain of Blame' and elsewhere.
September 15, 2008 -- A new "Black Monday" strikes the financial markets. Merrill Lynch and Lehman Brothers (both of which are featured in 'Chain of Blame') are no more. Merrill is sold on the cheap to Bank of America (the same firm that bought Angelo Mozilo's Countrywide). Lehman Brothers files for bankruptcy protection. Lehman and Merrill were key players in the subprime securitization market, lending billions to non-banks B&C lenders like Roland Arnall's Ameriquest Mortgage. According to National Mortgage News and the Quarterly Data Report, Lehman is also the nation's largest servicer of 'alt-A' loans with a portfolio of $80 billion.
September 9, 2008 -- Kerry Killinger, the Washington Mutual executive, who was at the helm when the thrift bought Roland Arnall's former subprime company (Long Beach Mortgage) is fired by management. WaMu bought LBM in 1999. The thrift's foray into subprime was its ultimate undoing.
September 7, 2008 -- On Sunday morning the government places congressionally chartered mortgage giants Fannie Mae and Freddie Mac into separate conservatorships, as Uncle Sam commits $100 billion to each while removing their CEOs and laying the groundwork for a radical and historic restructuring of the entire U.S. mortgage market. As part of the restructuring plan for the government-sponsored enterprises, the Treasury Department is providing capital and funding support in an effort to boost investor confidence in Fannie's and Freddie's $5.2 trillion worth of debt and mortgage-backed securities. Fannie and Freddie found themselves in financial hot water, in part, because they bought subprime and alt-A bonds. The sellers of these bonds? Answer: Wall Street firms that appear in 'Chain of Blame, How Wall Street Caused the Mortgage and Credit Crisis.'
August 18, 2008 -- The share prices of Fannie Mae and Freddie Mac fall more than 20% on the day after press reports suggest the Treasury Department may be forced to buy stock in the two companies to keep them afloat. In the second quarter Fannie Mae posted a $2.3 billion loss in the second quarter of 2008, Freddie Mac $821 million.
July 30, 2008 -- President Bush signs a landmark housing/mortgage bailout bill to shore up the nation's housing finance system. It includes $300 billion in new mortgages that can be insured by the Federal Housing Administration.
July 18, 2008 -- Lori Mozilo, the youngest sister of Angelo Mozilo, defends the former Countrywide chief in the Huffington Post. In defense of her brother she says Angelo, "believed every American could one day own a home and be a part of the shared experiment called America." She also blames Sen. Charles Schumer (D-N.Y.) for causing a run at IndyMac Bancorp, which Mozilo started with David Loeb two decades ago. Indy Mac failed in early July after Schumer leaked two letters he wrote to regulators concerning IndyMac's use of brokered deposits to The Wall Street Journal. The letters were written to the heads of the FDIC and OTS.
July 14, 2008 -- Merrill Lynch -- which once strived to take over the subprime lending market by purchasing First Franklin Financial -- posts a $4.7 billion net loss in the second quarter. It announced $9 billion in writedowns and losses that were partly mortgage-related.
July 10, 2008 -- Prices of Fannie Mae and common stock have plummeted over the past four days on concerns that the mortgage giants will have to raise substantially more capital this year to get through the housing downturn or the government will have to prop them up. The stock prices of the two government-sponsored enterprises plunged on Thursday after William Poole, former president of the Federal Reserve Bank of St. Louis, told Bloomberg that the two housing GSEs are insolvent.
July 1, 2008 -- Florida Attorney General Bill McCollum sues Countrywide Financial and its former chairman Angelo Mozilo for allegedly engaging in deceptive and unfair trade practices in originating subprime loans. The AG's lawsuit says the Calabasas, Calif.-based lender failed to ensure that borrowers could repay their loans and even placed prime borrowers into higher interest rate subprime loans.
July 1, 2008 -- Bank of America, Charlotte, completes its acquisition of Countrywide Financial Corp., creating the nation's largest mortgage originator and servicer. In January, BoA agreed to buy Countrywide for $4 billion in stock, but as the Charlotte bank saw its share price fall this year, so did the value of the deal. The final sale price is in the range of $2.5 billion, on top of the $2 billion that BoA paid last summer for a 16% stake in Countrywide.

How Wall Street Caused the Mortgage and Credit Crisis

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