United States Senate

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Committee on Homeland Security and Governmental Affairs

Carl Levin, ChairmanTom Coburn, Ranking Minority Member

WALL STREET ANDTHE FINANCIAL CRISIS:Anatomy of a Financial Collapse

MAJORITY AND MINORITYSTAFF REPORT

PERMANENT SUBCOMMITTEEON INVESTIGATIONSUNITED STATES SENATE

April 13, 2011

SENATOR CARL LEVINChairmanSENATOR TOM COBURN, M.D.Ranking Minority MemberPERMANENT SUBCOMMITTEE ON INVESTIGATIONS

ELISE J. BEAN

Staff Director and Chief Counsel

ROBERT L. ROACH

Counsel and Chief Investigator

LAURA E. STUBER

Counsel

ZACHARY I. SCHRAM

Counsel

DANIEL J. GOSHORN

Counsel

DAVID H. KATZ

Counsel

ALLISON F. MURPHY

Counsel

ADAM C. HENDERSON

Professional Staff Member

PAULINE E. CALANDE

SEC Detailee

MICHAEL J. MARTINEAU

DOJ Detailee

CHRISTOPHER J. BARKLEY

Staff Director to the Minority

ANTHONY G. COTTO

Counsel to the Minority

KEITH B. ASHDOWN

Chief Investigator to the Minority

JUSTIN J. ROOD

Senior Investigator to the Minority

VANESSA CAREIRO

Law Clerk

BRITTANY CLEMENT

Law Clerk

DAVID DeBARROS

Law Clerk

ERIN HELLING

Law Clerk

HELENA MAN

Law Clerk

JOSHUA NIMMO

Intern

ROBERT PECKERMAN

Intern

TANVI ZAVERI

Law Clerk

MARY D. ROBERTSON

Chief Clerk

Permanent Subcommittee on Investigations

199 Russell Senate Office Building – Washington, D.C. 20510Main Number: 202/224-9505Web Address: www.hsgac.senate.gov [Follow Link to “

Subcommittees

,” to “

Investigations

”]

WALL STREET AND THE FINANCIAL CRISIS:Anatomy of a Financial CollapseTABLE OF CONTENTS

I.EXECUTIVE SUMMARY

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

A.Subcommittee Investigation

. . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

B.Overview

. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2(1) High Risk Lending: Case Study of Washington Mutual Bank. . . . . . . . . . . . . . . . . . 2(2) Regulatory Failures: Case Study of the Office of Thrift Supervision. . . . . . . . . . . . . 4(3) Inflated Credit Ratings: Case Study of Moody’s and Standard & Poor’s.. . . . . . . . . 5(4) Investment Bank Abuses: Case Study of Goldman Sachs and Deutsche Bank.. . . . . 7

C.Recommendations

.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

II.BACKGROUND

.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

A.Rise of Too-Big-To-Fail U.S. Financial Institutions

. . . . . . . . . . . . . . . . . . . . . . . . . . . 15

B.High Risk Mortgage Lending

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

C.Credit Ratings and Structured Finance

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

D.Investment Banks

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

E.Market Oversight

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

F.Government Sponsored Enterprises

.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

G.Administrative and Legislative Actions

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

H.Financial Crisis Timeline

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

III.HIGH RISK LENDING:CASE STUDY OF WASHINGTON MUTUAL BANK

. . . . . . . . . . . . . . . . . . . . . . . . . . . 48

A.Subcommittee Investigation and Findings of Fact

.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

B.Background

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51(1) Major Business Lines and Key Personnel.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51(2) Loan Origination Channels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52(3) Long Beach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54(4) Securitization.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55(5) Overview of WaMu’s Rise and Fall. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

C.High Risk Lending Strategy

.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58(1) Strategic Direction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60(2) Approval of Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60(3) Definition of High Risk Lending.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62(4) Gain on Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64(5) Acknowledging Unsustainable Housing Price Increases.. . . . . . . . . . . . . . . . . . . . . . 65(6) Execution of the High Risk Lending Strategy.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

D.Shoddy Lending Practices

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75(1) Long Beach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75