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SUBPRIME LENDING 

results in August . Then, in September, SFC notified investors about “recent ad-
verse market conditions” in the securities markets and expressed concern about “the

continued viability of securitization in the foreseeable future.” A week later, SFC
filed for bankruptcy protection. Several other nonbank subprime lenders that were
also dependent on short-term financing from the capital markets also filed for bank-
ruptcy in  and . In the two years following the Russian default crisis,  of the
top  subprime lenders declared bankruptcy, ceased operations, or sold out to
stronger firms. 
When these firms were sold, their buyers would frequently absorb large losses.
First Union, a large regional bank headquartered in North Carolina, incurred charges
of almost . billion after it bought The Money Store. First Union eventually shut
down or sold off most of The Money Store’s operations.
Conseco, a leading insurance company, purchased Green Tree Financial, another
subprime lender. Disruptions in the securitization markets, as well as unexpected
mortgage defaults, eventually drove Conseco into bankruptcy in December . At
the time, this was the third-largest bankruptcy in U.S. history (after WorldCom and
Enron).
Accounting misrepresentations would also bring down subprime lenders. Key-
stone, a small national bank in West Virginia that made and securitized subprime
mortgage loans, failed in . In the securitization process—as was common prac-
tice in the s—Keystone retained the riskiest “first-loss” residual tranches for its
own account. These holdings far exceeded the bank’s capital. But Keystone assigned
them grossly inflated values. The OCC closed the bank in September , after dis-
covering “fraud committed by the bank management,” as executives had overstated
the value of the residual tranches and other bank assets. Perhaps the most signifi-

cant failure occurred at Superior Bank, one of the most aggressive subprime mort-
gage lenders. Like Keystone, it too failed after having kept and overvalued the
first-loss tranches on its balance sheet.
Many of the lenders that survived or were bought in the s reemerged in
other forms. Long Beach was the ancestor of Ameriquest and Long Beach Mortgage
(which was in turn purchased by Washington Mutual), two of the more aggressive
lenders during the first decade of the new century. Associates First was sold to Citi-
group, and Household bought Beneficial Mortgage before it was itself acquired by
HSBC in .
With the subprime market disrupted, subprime originations totaled  billion
in , down from  billion two years earlier. Over the next few years, however,

subprime lending and securitization would more than rebound.

THE REGULATORS: “OH, I SEE”
During the s, various federal agencies had taken increasing notice of abusive
subprime lending practices. But the regulatory system was not well equipped to re-
spond consistently—and on a national basis—to protect borrowers. State regulators,
as well as either the Fed or the FDIC, supervised the mortgage practices of state