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Lehman Brothers CEO Dick Fuld told Congress on October 6 that the Wall Street investment bank was destroyed by a "financial tsunami"—a natural disaster, an act of God.
In other words, it wasn't his fault.
But the truth is that Lehman's fall in the subprime-mortgage crisis was a man-made disaster. The white-shoe firm was not just deeply involved in the murky subprime-mortgage market; Lehman and the other dominant Wall Street investment banks, experts tell the Voice, actually created the demand for the mortgages that they would then package and swap for enormous returns. Addicted to the profits that such securities brought in, Lehman was desperate for the risky mortgages they required.
"Sure, there were sleazy brokers out there who were fooling people, but you have to understand—to use a drug analogy—they are like the 'corner boys,' " says Irv Ackelsberg, a Philadelphia lawyer who specializes in representing homeowners in foreclosure cases. "You have to look at the cartel at the top. The brokers were basically creating loans that had been ordered by Wall Street."
Put another way, Lehman and other top financial firms "primed the pump and controlled production," says Kevin Byers, an Atlanta forensic accountant who has spent years tracing the evolution of the subprime market.
"Lehman was very early in getting this deal machine into place," he says. "With one hand, they loaned the money to the mortgage lender to allow them to originate loans to home buyers. With the other hand, they ostensibly bought the loans originated with their line of credit, and resold them as securities to investors."
The scheme worked like this: Homeowners signed mortgages with loan companies. Lehman bought those mortgages and bundled them into "tranches," which they then sold to investors—often large pension funds and other financial institutions.
Jay Weiser, an associate professor of law and real estate at Baruch College, says the system was set up to assure the owners of the mortgage-backed securities that they would get a steady return. "Since everyone at the top was paid for how many mortgage-backed securities they put out each year, they had every incentive to look the other way and overstate the quality of the loans they were making," he says.
The subprime-mortgage market grew from $40 billion in 1994 to $600 billion in 2005. On the plus side, the securities offered rich and institutional investors a steady rate of return. That was true, of course, only if the mortgages were solid.
In fact, loan companies—especially the shadier ones—were issuing home loans to people who really couldn't afford them, or under terms that basically guaranteed the buyer would default once the interest rates soared.
Like most streetwise dealers, Lehman took a cut of just about every piece of the transaction all the way down the line. It (and other Wall Street firms) ended up pushing its loan companies to stretch even their flimsy standards and issue weak loans.
"Lehman was involved at all ends of this dirty business, so deeply involved that it set up shop at every single money-making stage," Ackelsberg says. "Basically, it was just a gold rush: a huge wealth transfer from middle-class families to Wall Street."
And it was a sweet proposition while it lasted. But like any racket, the subprime business had its seamier side. And for that, Lehman kept its squeaky-clean image by turning to a less holy subsidiary.
Call her Aurora.
When the mortgage market collapsed and the huge investment bank failed last month, it dragged other financial markets down with it. Lehman's executives walked away with buckets of cash.
But buried beneath the bank, way down at the bottom of the pile, are people like Brooklyn lawyer Philip Grant and Bart Christofferson, an excavator in Utah. They live 2,000 miles apart, but they have one thing in common: They were both worked over by a Lehman Brothers subsidiary called Aurora Loan Services.
Grant's story is that he got a little behind on his payments for a house in Brooklyn. When he sent in the checks that would catch him up, the Lehman subsidiary, Aurora, refused to accept the money and instead moved forward with a foreclosure. He lost the house and millions in future real estate appreciation.
Christofferson, meanwhile, says he could not make his payments because his tenant could not make the rent. So he went out and found buyers for the house, but he says the same Lehman subsidiary did nothing. He had to let the house fall into foreclosure. If he didn't, he would have lost everything.
In the epic tale that is the collapse of Lehman, Grant and Christofferson are two minor players, but they represent regular folks around the country who were burned by the Wall Street firm's financial practices. In the turmoil that has befallen the financial markets, however, the stories of people like Grant and Christofferson have been overlooked.
Such stories put the lie to Lehman's claim that it was committed to the "highest ethical standards," that there was a "Lehman Brothers standard" that set the firm above all others. Jonathan Doorley, a spokesman for Lehman Brothers Holdings, declined to comment on the firm's role in the mortgage crisis. He referred questions on Aurora to the Aurora headquarters in Colorado. Deborah Munies, an Aurora spokeswoman, did not return phone calls for comment.