DiversityInc - November/December 2008

THE BANKING CRISIS

them to investment banks such as Lehman Brothers and Bear Stearns, which then carried the debts on their balance sheets. Once the loans matured and they began collecting, their profits more than doubled.

“[Banks] played the middleman role. They convinced investors to partake in bad loans that were destined to fail,” says King. “Frankly, they were then enablers. They didn’t build the nuclear bomb but they gave the loans to the terrorist organizations that built the nuclear weapon.”

Thanks to subprime lending, more and more low-income people found it “easier” to get loans, and the number of homeowners grew tremendously.

Who Really
Benefited
From All This
Lending?

Iaccounted for 20 percent of n 2006, subprime mortgages

the nation’s mortgage lending.

That same year, Lehman Brothers posted a net revenue of $2.1 billion, up 40 percent from 2002. That year, CEO Richard S. Fuld Jr. received $13.7 million in

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bonuses and $75 million in stock gains, according to Forbes CEO-compensation data.

Bear Stearns posted some of its highest quarterly numbers in the company’s then-83-year history, more than $2 billion in net income. The company’s CEO, James E. Cayne, received $17 million in bonuses, according to Forbes’ data.

Freddie Mac and Fannie Mae were also convinced to buy these poorly packaged loans, which caused the government-backed institutions to almost go under this year (before federal government bailouts).

“We really didn’t know what we were buying,” Marc Gott, a former director in Fannie Mae’s loan-servicing department, told The New York Times. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”

Between 2005 and 2008, Fannie Mae purchased or

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guaranteed at least $270 billion in loans to risky borrowers, according to company filings, The New York Times reported.

Corporate
Culture of
Greed

FStearns’ total employee rom 2005 to 2006, Bear

compensation grew 22. 3 percent to $4.34 billion from $3.55 billion, which the company attributed to “higher discretionary compensation associated with the increase in net revenues and increased headcounts,” according to the company’s 2006 annual report. Lehman Brothers’ numbers were similar.

But the glory days wouldn’t last long. Once the subprime-mortgage loans matured and people were no longer able to make their mortgage payments, lenders and banks quickly realized their mistakes and couldn’t keep up with their financial losses. In May of this year, Bear Stearns nearly went bankrupt and went out of business five months later, and Lehman filed for bankruptcy and shut its doors after an unsuccessful quest to find a suitor.