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WALL-STREET-AND-THE-FINANCIAL-CRISIS_Anatomy-of-a-Financial-Collapse

WALL-STREET-AND-THE-FINANCIAL-CRISIS_Anatomy-of-a-Financial-Collapse

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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
”]
 
i
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

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