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Spring Cleaning For Free Market


Most offensive predatory lenders get theirs.


In the aftermath of the Bear Stearns (BSC) meltdown, it's healthy to see firms that bilked the system paying for their mortgage sins.

Despite government attempts to preserve existing rot in the financial system, the market is successfully punishing the worst offenders. Few, if any, will survive. At some point, the list will be long enough for a legitimate recovery to begin.

Of all the Wall Street firms that underwrote mortgage-backed securities, Bear Stearns was the most cavalier. It led the market in poorly underwritten Alt-A and subprime loans and bought the riskiest Option ARMs, 100% loan to value and stated income loans with little or no due diligence. Its servicing arm, EMC Mortgage, is one of the most unscrupulous in the business. Result: Collapse, takeover by JP Morgan (JPM).

Countrywide (CFC) automated to a point where controlling risk was impossible. The industry followed suit. The biggest independent mortgage lender in the country, its policies and practices became industry standard, including deceptive and predatory lending practices. Borrowed short, lent long, blew up. Result: Collapse, takeover by Bank of America (BAC).

Subprime lending used to be a niche corner of the lending market providing valuable banking services to the underserved. Easy money coupled with greed on the part of both borrowers and investors drove New Century, American Home, Ownit and hundreds of other subprime lenders to issue loans that could never be repaid. There are effectively no more subprime lenders in America. Result: Bankrupt.

Washington Mutual (WM) and National City (NCC), through its First Franklin division, swapped responsible banking for reckless lending. Wamu is under investigation for appraisal fixing and Nat City has put itself on the auction block. Neither is likely to survive as an independent entity. Result: Takeover, bankruptcy, nationalization are all possible.

Merrill Lynch's (MER) risk controls appear to have been nearly nonexistent. The most aggressive underwriter of Collateral Debt Obligations (CDOs), Merrill has lost tens of billions, fired its CEO and been forced to raise capital to remain solvent. Ditto Citigroup (C). Result: Takeover or breakup likely.

The mortgage crisis and credit crunch will ultimately claim more victims. Indeed they must so the market can right itself. We can take heart that, so far, the worst offenders have been the hardest hit. It's unfortunate that individual investors and employees, who took no part in any wrongdoing, have to lose, too.

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