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The statistics provided by these samples, according to Mr. Johnson and Vicki Beal, a senior vice president at Clayton who also testified before the inquiry commission, indicated that only 54 percent of the loans met the lenders’ underwriting standards, regardless of how stringent or weak they were.

Some 28 percent of the loans sampled over the period were outright failures — that is, they were unable to meet numerous underwriting standards and did not have positive factors that compensated for their failings. And yet, 39 percent of these troubled loans still went into mortgage pools sold to investors during the period, Clayton’s figures showed.

At Goldman Sachs, 19 percent of loans failed to make the grade in the final quarter of 2006 and the first half of 2007, but 34 percent of those loans were still sold by the firm. Throughout this period, Goldman Sachs was also betting against the mortgage market for its own account, according to documents provided to government investigators.

A Goldman Sachs spokesman said the percentage of deficient loans that went into its pools was smaller than Clayton’s average, indicating that the firm had done a better job than its peers. Because these loan samples were provided to the Wall Street investment banks that commissioned them, they could see throughout 2006 and into 2007 that the mortgages they were financing and selling to investors were becoming increasingly sketchy.

A more proper procedure, analysts said, would have been for lenders like these — New Century Financial and Fremont Investment and Loan among them — to buy back the problem loans and replace them with higher-quality mortgages. But because these companies did not have enough capital to do that, they were happy to sell the troubled mortgages cheaply to the brokerage firms.

Lehman Rocks Wall Street, Declares Bankruptcy

The Treasury Department and Federal Reserve watched Lehman implode, unable to predict the scope of the global financial damage that would follow.

While Lehman Brothers failed to find a buyer, Merrill Lynch succeeded

Merrill’s CEO Stan O’Neal was so fixated on the revenue generated by the mortgage business, he didn’t just want to securitize them, he wanted to originate them, too. So, in 2007, Merrill bought mortgage lender First Franklin.

Bank Of America Rescues Merrill From ExtinctionBy September 2008, Merrill Lynch was suffering huge mortgage-related losses.

Although Bank of America’s purchase of Merrill ultimately saved the company, the transaction later came under intense scrutiny because of larger-than-expected losses and controversial year-end bonuses paid to Merrill executives.

Fed Accused Of 'Cover Up' In BofA, Merrill Deal

“Too Big To Fail,” Feds Take Control Of AIG

Paulson And Bernanke Issue Dire Warning

Paulson requested $700 Billion from Congress for a program intended to buy toxic assets from banks and infuse financial institutions with capital

contained no rules and standards for oversight. Infuriated politicians

Washington Mutual, weighed down by mortgage-related losses, was seized by federal regulators and sold to JPMorgan Chase.

largest bank failure in U.S. history, caused by an old fashioned, Depression-like run on WaMu’s deposits, following rumors about the bank’s ability to survive. 

Dow Jones Industrial Average plunged a record 778 points, its biggest drop in history.

Congress acted again. This time, lawmakers  approved the package, known as the Troubled Asset Relief Program. It included significantly greater oversight of the $700 Billion and more specific details on how it would be used to bolster the U.S. banking system.

Paulson’s “tough love” was a bitter pill for some bank bosses to swallow.

some investors bought insurance policies called Credit Default Swaps, issued by companies such as AIG.  A CDS guaranteed an investor would not lose money, even on the riskiest asset, assuring a payment even if the underlying security defaulted.

Flush with billions, hedge funds and sovereign wealth funds gobbled up these CDOs.

One former Moody’s analyst says it was easy to “turn crap into Triple A.”

So Fannie and Freddie lowered their standards, just as the lenders had done. They began buying lesser-quality mortgages, including subprime loans, exactly the kind they avoided years earlier.

“Why not set an example of Bear Stearns, the guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough?” asked William A. Fleckenstein, president of Fleckenstein Capital in Issaquah, Wash., and co-author with Fred Sheehan of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.” “This is the perfect time to set an example, but they are not interested in setting an example. We are Bailout Nation.”

But, who knows what those mortgages are really worth? According to Bear Stearns’s annual report, $29 billion of them were valued using computer models “derived from” or “supported by” some kind of observable market data.

And here is the unfortunate refrain.  Investors, already mistrusting many corporate and government leaders, were once again assured that nothing was wrong — right up until the very end. So is it any wonder investors react to every market rumor of an impending failure with the certainty that it’s true? In too many cases, the rumors turned out to be true, notwithstanding the attempts at reassurance by executives and policy makers.

Bears Stearns was struggling, so was the Main Street retail bank Washington Mutual

Many more well-known companies would collapse

• Competitors were "snatching lucrative parts" and market share away; • Between 2001-04, the subprime mortgage market grew from $160 to $540 billion • Between 2005-08, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers.  • By 2004, Fannie had lost 56% of its loan-reselling business to Wall Street; • Angelo Mozilo, Countrywide Financial CEO, the nation’s largest mortgage lender, threatened to end their partnership unless Fannie started buying Countrywide’s riskier loans; • Congress was pressuring for more loans to low-income borrowers; • Hedge fund managers and other investors pressured Fannie executives that the company was not taking enough risk in pursuing profits; • Like many other firms, Fannie’s computer systems did a poor job of analyzing risky loans; • Between 2005-07 -- afte rthe market's peak -- Fannie's acquisitions of mortgages with less than 10% down payments almost tripled; • Fannie expanded in hot real estate areas like California and Florida; • From 2004-06, Fannie operated without a permanent chief risk officer;

But no real action was taken until early 2008, when the subprime meltdown brought down one of the most legendary firms on Wall Street.