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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
Even those who had profited from the growth of nontraditional lending practices
said they became disturbed by what was happening. Herb Sandler, the co-founder of
the mortgage lender Golden West Financial Corporation, which was heavily loaded
with option ARM loans, wrote a letter to officials at the Federal Reserve, the FDIC,
the OTS, and the OCC warning that regulators were “too dependent” on ratings
agencies and “there is a high potential for gaming when virtually any asset can be
churned through securitization and transformed into a AAA-rated asset, and when a
multi-billion dollar industry is all too eager to facilitate this alchemy.”
Similarly, Lewis Ranieri, a mortgage finance veteran who helped engineer the Wall
Street mortgage securitization machine in the s, said he didn’t like what he called
“the madness” that had descended on the real estate market. Ranieri told the Commis-
sion, “I was not the only guy. I’m not telling you I was John the Baptist. There were
enough of us, analysts and others, wandering around going ‘look at this stuff,’ that it
would be hard to miss it.” Ranieri’s own Houston-based Franklin Bank Corporation
would itself collapse under the weight of the financial crisis in November .
Other industry veterans inside the business also acknowledged that the rules of
the game were being changed. “Poison” was the word famously used by Country-
wide’s Mozilo to describe one of the loan products his firm was originating. “In all
my years in the business I have never seen a more toxic [product],” he wrote in an in-
ternal email. Others at the bank argued in response that they were offering prod-
ucts “pervasively offered in the marketplace by virtually every relevant competitor of
ours.” Still, Mozilo was nervous. “There was a time when savings and loans were
doing things because their competitors were doing it,” he told the other executives.
“They all went broke.”
In late , regulators decided to take a look at the changing mortgage market.
Sabeth Siddique, the assistant director for credit risk in the Division of Banking Su-
pervision and Regulation at the Federal Reserve Board, was charged with investigat-
ing how broadly loan patterns were changing. He took the questions directly to large
banks in and asked them how many of which kinds of loans they were making.
Siddique found the information he received “very alarming,” he told the Commis-
sion. In fact, nontraditional loans made up percent of originations at Coun-
trywide, percent at Wells Fargo, at National City, at Washington
Mutual, . at CitiFinancial, and . at Bank of America. Moreover, the banks
expected that their originations of nontraditional loans would rise by in , to
. billion. The review also noted the “slowly deteriorating quality of loans due to
loosening underwriting standards.” In addition, it found that two-thirds of the non-
traditional loans made by the banks in had been of the stated-income, minimal
documentation variety known as liar loans, which had a particularly great likelihood
of going sour.
The reaction to Siddique’s briefing was mixed. Federal Reserve Governor Bies re-
called the response by the Fed governors and regional board directors as divided
from the beginning. “Some people on the board and regional presidents . . . just
wanted to come to a different answer. So they did ignore it, or the full thrust of it,” she
told the Commission. 
