Reports that Matter
Television crews and onlookers on Seventh Avenue at night outside the lit headquarters of Lehman Brothers, its ticker reading "SEP 15", on the day the bank filed for bankruptcy.
Lehman Brothers, New York, 15 September 2008 · Photo: Robert Scoble, CC BY 2.0

Report · 2011

Wall Street and the Financial Crisis: Anatomy of a Financial Collapse

The U.S. Senate's two-year investigation into what caused the 2008 financial crisis, built on tens of millions of pages of the banks' own emails and documents. It names the institutions, quotes their people, and shows how a bank, its regulator, the rating agencies and Wall Street's investment banks each fed the collapse.

U.S. Senate Permanent Subcommittee on Investigations · 13 April 2011

325,837 words · 32 sections

Original document ↗

Introduction by Reports that Matter. Only words in quotation marks are the report's own; every link opens them in context.

Background

In September 2008 the American financial system came close to collapse. Lehman Brothers failed; the government took over Fannie Mae, Freddie Mac and AIG; and Washington Mutual became the largest bank failure in U.S. history. The recession that followed cost millions of Americans their jobs and their homes, and the crisis spread to banks around the world.

The Senate's Permanent Subcommittee on Investigations, chaired by Carl Levin with Tom Coburn as its ranking Republican, spent two years asking how it happened. It subpoenaed tens of millions of pages, held four hearings in April 2010, and published this report, written jointly by the majority and minority staff, in April 2011.

Its method is the case study, told through the institutions' own emails: a lender (Washington Mutual), its regulator (the Office of Thrift Supervision), the two largest credit rating agencies (Moody's and Standard & Poor's), and two investment banks (Goldman Sachs and Deutsche Bank). Levin referred the report to the Justice Department and the SEC; no criminal charges followed.

What it found

  1. Washington Mutual moved deliberately into high risk loans because Wall Street paid more for them. Lending like this, across the industry, was what set the crisis off. p. 2 p. 4 p. 4

    “These lenders were not the victims of the financial crisis; the high risk loans they issued were the fuel that ignited the financial crisis.”
    p. 4 · Read in context →

  2. The regulator saw the problems at WaMu year after year and never acted in public. p. 5 p. 4

    “Despite identifying over 500 serious deficiencies in five years, OTS did not once, from 2004 to 2008, take a public enforcement action against Washington Mutual to correct its lending practices, nor did it lower the bank's rating for safety and soundness.”
    p. 5 · Read in context →

  3. Moody's and S&P, paid by the firms whose products they rated, gave top ratings to securities that later collapsed. Over 90% of the AAA ratings on 2006 and 2007 subprime securities were later cut to junk. p. 7 p. 6 p. 7

    “Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both.”
    p. 245 · Read in context →

  4. Goldman Sachs sold mortgage securities to its clients while betting against the market, and in some deals against the very securities it was selling, without telling them. p. 9 p. 9

    “Within ten days of that sale, Thomas Montag, a senior Goldman executive, sent an email to the Mortgage Department head, Daniel Sparks, stating: "boy that timeberwof [Timberwolf] was one shitty deal."”
    p. 394 · Read in context →

  5. Deutsche Bank's top CDO trader called the assets "crap" and the market a "ponzi scheme" while the bank went on selling CDOs built from them. p. 10 p. 10

  6. The four causes were interlocking, and together they produced the crisis. p. 12

Where to start reading

Short on time? These sections carry the report's argument. Each opens at the start of the section.

  1. Executive summary p. 2 · Read →

    The whole argument in twelve pages — four causes, four case studies, and what the Subcommittee recommended.

  2. Washington Mutual's high risk lending strategy p. 59 · Read →

    How a bank chose riskier loans on purpose, in its own planning documents.

  3. Washington Mutual's destructive compensation practices p. 144 · Read →

    Loan officers rewarded for volume, and the one executive who pushed back on "The Power of Yes".

    “…the power of yes absolutely needed to be balanced by the wisdom of no.”
    p. 146 · Read in context →
  4. Regulatory failures p. 209 · Read →

    Why the Office of Thrift Supervision never stopped it — deference to the bank, and a fight with the FDIC.

  5. Inside the rating agencies p. 268 · Read →

    The analysts' own emails and instant messages about the securities they were rating.

    “In an April 2007 instant message, an S&P analyst offered this cynical comment: "[W]e rate every deal[.] [I]t could be structured by cows and we would rate it."”
    p. 297 · Read in context →
  6. Timberwolf, one deal from start to finish p. 542 · Read →

    How Goldman sold a CDO to its clients while marking down the same securities on its own books.

Contents

Read the whole report on one page →