EMBARGOED FOR RELEASE Contacts: Tara Andringa (Levin) 202-228-3685

April 13, 2011 John Hart (Coburn) 202-228-5357

Senate Investigations Subcommittee Releases

Levin-Coburn Report On the Financial Crisis
WASHINGTON – Concluding a two-year bipartisan investigation, Senator Carl Levin,
D-Mich., and Senator Tom Coburn M.D., R-Okla., Chairman and Ranking Republican on the
Senate Permanent Subcommittee on Investigations, today released a 635-page final report on
their inquiry into key causes of the financial crisis. The report catalogs conflicts of interest,
heedless risk-taking and failures of federal oversight that helped push the country into the
deepest recession since the Great Depression.

“Using emails, memos and other internal documents, this report tells the inside story of
an economic assault that cost millions of Americans their jobs and homes, while wiping out
investors, good businesses, and markets,” said Levin. “High risk lending, regulatory failures,
inflated credit ratings, and Wall Street firms engaging in massive conflicts of interest,
contaminated the U.S. financial system with toxic mortgages and undermined public trust in U.S.
markets. Using their own words in documents subpoenaed by the Subcommittee, the report
discloses how financial firms deliberately took advantage of their clients and investors, how
credit rating agencies assigned AAA ratings to high risk securities, and how regulators sat on
their hands instead of reining in the unsafe and unsound practices all around them. Rampant
conflicts of interest are the threads that run through every chapter of this sordid story.”

“The free market has helped make America great, but it only functions when people deal
with each other honestly and transparently. At the heart of the financial crisis were unresolved,
and often undisclosed, conflicts of interest,” said Dr. Coburn. “Blame for this mess lies
everywhere from federal regulators who cast a blind eye, Wall Street bankers who let greed run
wild, and members of Congress who failed to provide oversight.”

The Levin-Coburn report expands on evidence gathered at four Subcommittee hearings in

April 2010, examining four aspects of the crisis through detailed case studies: high-risk
mortgage lending, using the case of Washington Mutual Bank, a $300 billion thrift that became
the largest bank failure in U.S. history; regulatory inaction, focusing on the Office of Thrift
Supervision’s failed oversight of Washington Mutual; inflated credit ratings that misled
investors, examining the actions of the nation’s two largest credit rating agencies, Moody’s and
Standard & Poor’s; and the role played by investment banks, focusing primarily on Goldman
Sachs, creating and selling structured finance products that foisted billions of dollars of losses on
investors, while the bank itself profited from betting against the mortgage market.
 New Evidence. Today’s report presents new facts, new findings and recommendations,
with more than 700 new documents totaling over 5,800 pages. It recounts how Washington
Mutual aggressively issued and sold high-risk mortgages to Wall Street, Fannie Mae, and
Freddie Mac, even as its executives predicted a housing bubble that would burst, and offers new
detail about how its regulator deferred to the bank’s management. New documents show how
Goldman used net short positions to benefit from the downturn in the mortgage market, and
designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm’s
clients and at times led to the bank’s profiting from the same products that caused substantial
losses for its clients. Other new information provides additional detail about how credit rating
agencies rushed to rate new mortgage-backed securities and collect lucrative rating fees before
issuing mass ratings downgrades that shocked the financial markets and triggered a collapse in
the value of mortgage related securities. Over 120 new documents provide insights into how
Deutsche Bank contributed to the mortgage mess.

“Our investigation found a financial snake pit rife with greed, conflicts of interest, and
wrongdoing,” said Levin. Among the report’s highlights are the following.

• High Risk Lending. With an eye on short term profits, Washington Mutual launched a
strategy of high-risk mortgage lending in early 2005, even as the bank’s own top
executives stated that the condition of the housing market “signifies a bubble” with risks
that “will come back to haunt us.” Executives forged ahead despite repeated warnings
from inside and outside the bank that the risks were excessive, its lending standards and
risk management systems were deficient, and many of its loans were tainted by fraud or
prone to early default. WaMu’s chief credit officer complained at one point that “[a]ny
attempts to enforce [a] more disciplined underwriting approach were continuously
thwarted by an aggressive, and often times abusive group of Sales employees within the
organization.” From 2003 to 2006, WaMu shifted its loan originations from low risk,
fixed rate mortgages, which fell from 64% to 25% of its loan originations, to high risk
loans, which jumped from 19% to 55% of its originations. WaMu and its subprime
lender, Long Beach Mortgage, securitized hundreds of billions of dollars in high risk,
poor quality, sometimes fraudulent mortgages, at times without full disclosure to
investors, weakening U.S. financial markets. New analysis shows how WaMu sold some
of its high risk loans to Fannie Mae and Freddie Mac, and played one off the other to
make more money.

• Regulatory Failures. The Office of Thrift Supervision (OTS), Washington Mutual’s

primary regulator, repeatedly failed to correct WaMu’s unsafe and unsound lending
practices, despite logging nearly 500 serious deficiencies at the bank over five years,
from 2003 to 2008. New information details the regulator’s deference to bank
management and how it used the bank’s short term profits to excuse high risk activities.
Although WaMu recorded increasing problems from its high risk loans, including
delinquencies that doubled year after year in its risky Option Adjustable Rate Mortgage
(ARM) portfolio, OTS examiners failed to clamp down on WaMu’s high risk lending.
OTS did not even consider bringing an enforcement action against the bank until it began
losing substantial sums in 2008. OTS also failed until 2008, to lower the bank’s overall
high rating or the rating awarded to WaMu’s management, despite the bank’s ongoing
failure to correct serious deficiencies. When the Federal Deposit Insurance Corporation
(FDIC) advocated taking tougher action, OTS officials not only refused, but impeded
FDIC oversight of the bank. When the New York State Attorney General sued two
 appraisal firms for colluding with WaMu to inflate property values, OTS took nearly a
year to conduct its own investigation and finally recommended taking action -- a week
after the bank had failed. The OTS Director treated WaMu, which was its largest thrift
and supplied 15% of the agency’s budget, as a “constituent” and struck an apologetic
tone when informing WaMu’s CEO of its decision to take an enforcement action. When
diligent oversight conflicted with OTS officials’ desire to protect their “constituent” and
the agency’s own turf, they ignored their oversight responsibilities.

• Inflated Credit Ratings. The Report concludes that the most immediate cause of the
financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard &
Poor’s that exposed the risky nature of mortgage-related investments that, just months
before, the same firms had deemed to be as safe as Treasury bills. The result was a
collapse in the value of mortgage related securities that devastated investors. Internal
emails show that credit rating agency personnel knew their ratings would not “hold” and
delayed imposing tougher ratings criteria to “massage the … numbers to preserve market
share.” Even after they finally adjusted their risk models to reflect the higher risk
mortgages being issued, the firms often failed to apply the revised models to existing
securities, and helped investment banks rush risky investments to market before tougher
rating criteria took effect. They also continued to pull in lucrative fees of up to $135,000
to rate a mortgage backed security and up to $750,000 to rate a collateralized debt
obligation (CDO) – fees that might have been lost if they angered issuers by providing
lower ratings. The mass rating downgrades they finally initiated were not an effort to
come clean, but were necessitated by skyrocketing mortgage delinquencies and securities
plummeting in value. In the end, over 90% of the AAA ratings given to mortgage-
backed securities in 2006 and 2007 were downgraded to junk status, including 75 out of
75 AAA-rated Long Beach securities issued in 2006. When sound credit ratings
conflicted with collecting profitable fees, credit rating agencies chose the fees.

• Investment Banks and Structured Finance. Investment banks reviewed by the

Subcommittee assembled and sold billions of dollars in mortgage-related investments that
flooded financial markets with high-risk assets. They charged $1 to $8 million in fees to
construct, underwrite, and market a mortgage-backed security, and $5 to $10 million per
CDO. New documents detail how Deutsche Bank helped assembled a $1.1 billion CDO
known as Gemstone 7, stood by as it was filled it with low-quality assets that its top CDO
trader referred to as “crap” and “pigs,” and rushed to sell it “before the market falls off a
cliff.” Deutsche Bank lost $4.5 billion when the mortgage market collapsed, but would
have lost even more if it had not cut its losses by selling CDOs like Gemstone. When
Goldman Sachs realized the mortgage market was in decline, it took actions to profit
from that decline at the expense of its clients. New documents detail how, in 2007,
Goldman’s Structured Products Group twice amassed and profited from large net short
positions in mortgage related securities. At the same time the firm was betting against
the mortgage market as a whole, Goldman assembled and aggressively marketed to its
clients poor quality CDOs that it actively bet against by taking large short positions in
those transactions. New documents and information detail how Goldman recommended
four CDOs, Hudson, Anderson, Timberwolf, and Abacus, to its clients without fully
disclosing key information about those products, Goldman’s own market views, or its
adverse economic interests. For example, in Hudson, Goldman told investors that its
interests were “aligned” with theirs when, in fact, Goldman held 100% of the short side
of the CDO and had adverse interests to the investors, and described Hudson’s assets
 were “sourced from the Street,” when in fact, Goldman had selected and priced the assets
without any third party involvement. New documents also reveal that, at one point in
May 2007, Goldman Sachs unsuccessfully tried to execute a “short squeeze” in the
mortgage market so that Goldman could scoop up short positions at artificially depressed
prices and profit as the mortgage market declined.
Recommendations. The Report offers 19 recommendations to address the conflicts of
interest and abuses exposed in the Report. The recommendations advocate, for example, strong
implementation of the new restrictions on proprietary trading and conflicts of interest; and action
by the SEC to rank credit rating agencies according to the accuracy of their ratings. Other
recommendations seek to advance low risk mortgages, greater transparency in the marketplace,
and more protective capital, liquidity, and loss reserves.

PSI REPORT - Wall Street & the Financial Crisis - Anatomy of a Financial Collapse
FOOTNOTE EXHIBIT LOCATOR (by FN and Bates)
FN 107 - 1342 (pgs 1-1037)
FN 1343 - 1459 (pgs 1038-2164)
FN 1462 - 1576 (pgs 2165-3003)
FN 1584 - 1622 (pgs 3004-3448)
FN 1623 - 2406 (pgs 3449-4484)
FN 2409 - 2706 (pgs 4485-5459)
FN 2724 - 2831 (pgs 5460-5901)

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