From the Wall Street Journal, no less. (Their investigative reporting remains excellent even as neanderthals lumber across their editorial page. Lest we forget, it was WSJ that broke the Enron story. Two of their reporters went digging and said, whoa, these numbers do not add up.)
Twelve years ago, Lehman Brothers Holdings sent a VP to look into making loans to First Alliance Mortgage Co. The VP reported back that First Alliance was a” financial ‘sweat shop’ specializing in ‘high pressure sales for people who are in a weak state.’ At First Alliance, he said, employees leave their ‘ethics at the door.’ “
Lehman apparently left their ethics out the door too, as they loaned First Alliance $500 million, then sold $700 million in bonds backed by the loans. The company cratered and a federal jury found that Lehman “helped First Alliance defraud customers.”
So why would investment banks knowingly back such risky loans? “Because most of the risks that loans would go bad were passed to investors.” Once the loans were packaged as bonds and sold, the investment bank had little or no exposure left. Should the loans go bad, well that would be someone else’s problem, because they were making millions.