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THE MORTGAGE MACHINE 

sidiaries . . . were responsible for almost  percent of subprime mortgage loans, .
percent of the Alt-A loans, and  percent of the pay-option and interest-only ARMs
that were sold.” Madigan told the FCIC:

Even as the Fed was doing little to protect consumers and our financial
system from the effects of predatory lending, the OCC and OTS were
actively engaged in a campaign to thwart state efforts to avert the com-
ing crisis. . . . In the wake of the federal regulators’ push to curtail state
authority, many of the largest mortgage-lenders shed their state licenses
and sought shelter behind the shield of a national charter. And I think
that it is no coincidence that the era of expanded federal preemption
gave rise to the worst lending abuses in our nation’s history. 

Comptroller Hawke offered the FCIC a different interpretation: “While some crit-
ics have suggested that the OCC’s actions on preemption have been a grab for power,
the fact is that the agency has simply responded to increasingly aggressive initiatives
at the state level to control the banking activities of federally chartered institutions.” 

MORTGAGE SECURITIES PLAYERS:
“WALL STREET WAS VERY HUNGRY FOR OUR PRODUCT”

Subprime and Alt-A mortgage–backed securities depended on a complex supply
chain, largely funded through short-term lending in the commercial paper and repo
market—which would become critical as the financial crisis began to unfold in .
These loans were increasingly collateralized not by Treasuries and GSE securities but
by highly rated mortgage securities backed by increasingly risky loans. Independent
mortgage originators such as Ameriquest and New Century—without access to de-
posits—typically relied on financing to originate mortgages from warehouse lines of
credit extended by banks, from their own commercial paper programs, or from
money borrowed in the repo market.
For commercial banks such as Citigroup, warehouse lending was a multibillion-
dollar business. From  to , Citigroup made available at any one time as much
as  billion in warehouse lines of credit to mortgage originators, including  mil-

lion to New Century and more than . billion to Ameriquest. Citigroup CEO
Chuck Prince told the FCIC he would not have approved, had he known. “I found out
at the end of my tenure, I did not know it before, that we had some warehouse lines
out to some originators. And I think getting that close to the origination function—
being that involved in the origination of some of these products—is something that I
wasn’t comfortable with and that I did not view as consistent with the prescription I
had laid down for the company not to be involved in originating these products.” 
As early as , Moody’s called the new asset-backed commercial paper (ABCP)

programs “a whole new ball game.” As asset-backed commercial paper became a
popular method to fund the mortgage business, it grew from about one-quarter to
about one-half of commercial paper sold between  and .