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
“[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.
From All This
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
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
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
guaranteed at least $270 billion
in loans to risky borrowers,
according to company filings, The
New York Times reported.
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.
By the end of 2006, 1. 2 million foreclosure filings had been
reported, severely damaging lenders, who still had many of these