Study: Bailed Out Banks Fueled Subprime Lending

Created: May 06, 2009 08:54 | Last updated: July 31, 2020 00:00

An investigation out today from the Center for Public Integrity details the nearly $370 million spent by top subprime lenders over the past decade to fend off regulation in Washington. While that’s disturbing enough, the study make clear that some of the major banks being bailed out by taxpayers were hardly victims of those subprime lenders, The Los Angeles Times reports. Instead, some of the very same banks now receiving federal TARP funds to stem the losses from toxic mortgage securities eagerly bankrolled the lenders’ activities, providing the necessary capital to keep the subprime mortgage machine going.

The center collected data on the top two dozen subprime lenders in an effort to paint a comprehensive picture of how each major player was linked to the banking system.

“What happened to our largest financial institutions was very much a self-inflicted wound,” said the center’s executive director, Bill Buzenberg. “These banks owned many of the subprime lenders and financed their lending in order to get bundles of mortgage-backed securities that they could sell, reaping enormous profits.”

The report noted that investment banks Lehman Bros., Merrill Lynch, J.P. Morgan and Citigroup “both owned and financed subprime lenders,” and that others, including Goldman Sachs & Co. and Swiss bank Credit Suisse First Boston, were major financial backers of subprime lenders.

The study is interesting because the extent to which banks bankrolled subprime lenders hasn’t previously gotten the scrutiny it deserves. With financial regulation on the table, the role of banks in fueling the subprime machine should get a much closer look now.