Chapter 18
Mortgage Case Studies: Countrywide and Northern Rock
CASE STUDY ONE: COUNTRYWIDE FINANCIAL1
Event Summary
Countrywide Financial, the largest home lender in the United States, found itself under liquidity pressure in August 2007 when the markets experienced extreme volatility as a result of rising defaults in the subprime mortgage market. Countrywide first tapped into an $11.5 billion credit line and then accepted $2 billion in financing from Bank of America. The lender later announced, on January 11, 2008, that it had agreed to be fully acquired by Bank of America for about $4 billion in stock, or approximately $6.90 per share. Countrywide's shares had been selling for $42 per share in January 2007. The value of the deal was later reduced to $2.8 billion.
Countrywide's troubles triggered a class action lawsuit that contends that the lender issued “materially false and misleading statements regarding the company's business and financial results” during the period from January 31, 2006, through August 9, 2007. In addition, the firm was accused of perpetuating predatory business practices in its emphasis on selling loans with high associated fees to consumers. Countrywide announced a $1.2 billion third-quarter loss on October 26, 2007; this was its first reported loss in 25 years.
Event Details
In 2007, Countrywide had $408 billion in mortgage originations and a servicing portfolio of about $1.5 trillion with 9 million loans. Rumors that Countrywide was in trouble contributed to extreme volatility in the markets during the month of August 2007. Countrywide had issued an alert the previous month indicating that its earnings were likely to be down as a result of defaults in the lower end of the home equity sector. The loans that were not performing optimally were its home equity lines of credit, subprime mortgage loans, and closed-end second lien loans. This led Countrywide to announce that it was putting aside $388 million to cover risks associated with these loans. The company's CEO, Angelo Mozilo, further scared the markets when he commented that “we are experiencing home-price depreciation almost like never before, with the exception of the Great Depression” (McClean and Nocera 2010).
Among the problems suffered by Countrywide was a run on the bank on August 20, 2007, when customers lined up at its offices in several U.S. cities in order to inquire about their deposits and withdraw funds. This caused worry among analysts, because Countrywide had already stated that it planned to use its banking unit as a source of funding for home loans. A run on the lender's certificates of deposit, for instance, would mean that it would be unable to fund its lending business.
In addition to its credit problems, concern was expressed about the company's business practices. The New York Times reported (8/26/2007) that Countrywide's entire profit structure was predicated on earning fees that were higher than industry averages on loan issuance and servicing. The mortgage lender's sales team received higher commissions if they sold loans that carried prepayment penalties with longer terms than the average, or loans that reset after a short period of time at higher than average rates. Sales executives were also compensated if they convinced borrowers to take out home equity loans at the same time as primary mortgages. One former unnamed sales representative told the New York Times that “the whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary markets.”
Countrywide's reliance on bundling and selling mortgages in the secondary markets was believed to be at the core of its problems, because it encouraged what could be deemed predatory selling behavior among its sales team, and lax lending standards among loan underwriters. For instance, subprime mortgages were especially lucrative for Countrywide because they were favored by investors in the secondary market for the higher returns they yielded. This was a self-perpetrating loop that led to the payment of higher commissions to sales executives who sold higher-priced mortgages to borrowers who might have qualified for lower rates.
The New York Times (8/23/2007) reported that what added to the pressure on Countrywide was its alleged “quiet promise” to investors in its loans in the secondary markets that it would repurchase any mortgages that failed to perform. According to the New York Times, Countrywide's loan modification agreements cover about $122 billion worth of mortgages that were sold to investors between 2004 and April 1, 2007. A Countrywide spokesperson, however, contended that the amount of loans that can be modified in any mortgage pool that it has sold in the secondary markets is limited to 5 percent.
Countrywide announced on August 20, 2007, that it was planning to eliminate 500 jobs from its Full Spectrum and wholesale lending divisions. Full Spectrum specialized in subprime and Alt-A loans, which often have no-documentation attributes. The wholesale division arranged loans primarily through brokers. Countrywide at the time employed a workforce in the range of 60,000. Approximately 25 percent of the subprime loans serviced by Countrywide were in default as of June 2007, compared with 15 percent for the same period during the prior year.
Countrywide was the largest originator of home loans in the United States with a 17 percent market share. The number two lender was Wells Fargo, with 10.5 percent. With the acquisition of Countrywide, Bank of America now became the largest home loan lender, with a 25 percent market share. Bank of America has low exposure to the subprime sector; it exited the business in 2001 when its newly appointed CEO, Kenneth Lewis, deemed the business too risky. In addition, Bank of America relies on its substantial pool of retail deposits, rather than the securitization of mortgages, to finance its lending activities.
Countrywide's troubles triggered a class action lawsuit alleging that Countrywide issued “materially false and misleading statements regarding the company's business and financial results” during the period from January 31, 2006, through August 9, 2007. Such shareholder lawsuits are not uncommon when a company experiences financial difficulties. The American Federation of State, County and Municipal Employees’ pension fund, which holds shares in Countrywide, called for CEO Mozilo's ouster and cited a long list of grievances.
Three U.S. states filed lawsuits against Countrywide during the month of June 2008. The states of California and Illinois filed lawsuits contending that the mortgage lender engaged in improper sales practices and sold mass-produced risky mortgages to thousands of home owners. Both states allege that as a result of Countrywide's sales practices, their local economies and housing markets have suffered irrevocable damage. California State Attorney General Jerry Brown (now governor) called Countrywide “a mass-production loan factory” that produced “ever-increasing streams of debt without regard for borrowers.” He also commented, “Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market” (2008). Washington State also filed a lawsuit against Countrywide, contending that the mortgage lender engaged in discriminatory lending practices in addition to the selling of unsuitable loans. The state analyzed over 600 Countrywide loans and found 50 instances where minority borrowers received “less favorable” loans than others. The study found that in instances where minority and non-minority borrowers had similar credit scores and loan-to-value ratios on their purchased properties, the minority borrowers received loans with higher interest payments and less advantageous terms. The state is seeking to suspend Countrywide's license in the state and fine the lender $1 million.
Control Failings and Contributory Factors
Corporate/Market Conditions
Market conditions for all financial institutions and lenders became so precarious during August 2007 that the Federal Reserve stepped in to add liquidity to the markets. The Federal Reserve last provided cash to the banking system in 1998 during the collapse of Long-Term Capital Management. This suggests that conditions that led to Countrywide's troubles were at least a once-in-10-years event. When the Federal Reserve moved to cut the discount borrowing rate, it released a statement saying that risk in the markets had increased “appreciably.” Jan Hatzius, chief U.S. economist for Goldman Sachs, commented: “In Fed-speak, things are either ‘slightly’ or ‘somewhat.’ Saying that the risks have increased ‘appreciably’ is a pretty strong statement for them.”
Improper Management Practices
The New York Times (8/26/2007) reported that Countrywide's businesses, which include lending, servicing, and closing divisions, were designed to squeeze from consumers every possible dollar in fees. The newspaper reported that the mortgage lender was not necessarily living up to its promise of “the best loan possible,” and that, in some cases, it did not count certain streams of income, such as cash reserves, in order to justify issuing higher-cost loans to borrowers. This strategy allegedly influenced how mortgage brokers and sales executives were compensated. They were paid higher commissions for loans with lengthier-than-average prepayment terms, and for loans that reset after a short period of time with higher-than-average rates. In addition, sales personnel earned higher commissions if they convinced a borrower to take out a home equity loan at the same time as a primary mortgage.
Compensation
The New York Times (8/26/2007) criticized Countrywide's CEO for being “a huge seller” of his company's stock during the prior few years and for not buying a single share in the company since 1987. The Times contended that as subprime troubles unfolded, Mr. Mozilo's selling of Countrywide's shares accelerated. During a 12-month period ending in late August 2007 he made $129 million from selling Countrywide shares. He continued to hold 1.4 million shares in Countrywide, or 24 percent of the company, which were estimated to be worth $29.4 million. A company spokesperson commented that Mr. Mozilo was simply diversifying his portfolio as he approached retirement. An unidentified source, quoted by several publications on October 18, 2007, disclosed that Mozilo's stock sales were being informally investigated by the Securities and Exchange Commission (SEC). Mr. Mozilo was not expected to have a role in the newly combined organization.
Undertook Excessive Risks
The New York Times reported that Countrywide issued certain risky loans even after some of the problems in the subprime market emerged. For instance, Countrywide allegedly issued loans that required no money down through March 2007, and no-documentation loans that required only 5 percent down, through February 2007. The lender issued loans through late July 2007 in amounts up to $500,000 to borrowers with credit scores as low as 500 if they put down 30 percent deposits.
Conflict of Interest
The Wall Street Journal reported in several articles that a group of individuals nicknamed “Friends of Angelo” were able to obtain loans at favorable rates and with laxer than average lending standards as the result of Mr. Mozilo's intercession. These individuals included retired professional athletes, two senators, and two former CEOs of mortgage-acquirer Fannie Mae. Mr. Mozilo allegedly continued to intercede in securing loans for his “friends” even after the mortgage sector started to exhibit increased defaults.
Corrective Actions and Management Response
Countrywide ran newspaper ads in major cities on August 20, 2007, assuring clients that their deposits were safe. The advertisements sought to reassure Countrywide's investors and customers by declaring that its “future is bright.” Countrywide offered the high rate of a 5.65 percent yield on its 12-month certificates of deposit. In addition, Countrywide stated that it would originate only loans that could be sold off to Fannie Mae or Freddie Mac; this would preclude the lender from originating jumbo loans in the near future.
Countrywide announced on August 16, 2007, that it had tapped its entire $11.5 billion line of credit with a group of 40 banks in an effort to “navigate” difficult markets. The lender said that it would tighten credit standards for all types of loans that it originates. David Sambol, the company's president and chief operating officer, said in this announcement, “Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise.” Some of these changes included a restructuring that would shift the lender's mortgage business into its banking subsidiary, Countrywide Bank.
Countrywide announced on October 23, 2007, that it was planning to refinance nearly $16 billion of debt for more than 52,000 subprime borrowers who had adjustable-rate mortgages scheduled to reset in the next 14 months. This was an effort by Countrywide to stave off a flood of additional foreclosures on borrowers’ properties. It was a strategy that other mortgage lenders have deployed as well; Washington Mutual announced that it pledged $2 billion to a program that will convert subprime mortgages into traditional 30-year fixed-rate loans.
Lessons Learned
The rapid descent into a cash crunch for the country's largest mortgage lender demonstrates the complexity of the operating environment in August 2007. Guy Cecala, publisher of the Inside Mortgage Finance newsletter, commented that he was “shocked” by Countrywide's troubles and added that “there is no question that we've never seen this kind of panic going on. The panic has cleared out all sources of financing.” He characterized Countrywide as the “face of the U.S. mortgage industry” and added: “to have them fail would have a huge impact on the U.S. economy and send huge repercussions around the world.”
If Countrywide was the “face of the U.S. mortgage industry” at one time, it has also been touted as the “face” of credit-related excess in the United States. BusinessWeek reported (1/14/2008) that “every go-go period on Wall Street has a spectacular flame-out that comes to symbolize the excesses of the day, from Sam Insull's Middle West Utilities during the Great Depression to Pets.com in the dot-com era. Now it's Countrywide Financial's turn.”
Aftermath of Event
Fitch, the ratings agency, downgraded Countrywide's issuer default ratings after the announcement that the mortgage lender had drawn down its $11.5 billion credit line. The rating agency called this “a clear sign that liquidity pressure was mounting.” Fitch also stated that while the decision was cause for concern, it also relieved some pressure on Countrywide in the near term and blamed the lender's problems on “unprecedented disruption in the capital markets” rather than “a fundamental breakdown of the company's financing plan or strategy.” Fitch commented that the company's outlook “hinges on the return of normal secondary market conditions” and noted that Countrywide was safer than others because it had a thrift charter, which provides access to a significant deposit base and Federal Home Loan Bank funding.
In the first report on earnings after Countrywide's credit problems emerged, the lender announced on October 26, 2007, that it had suffered a $1.2 billion loss for the third quarter of 2007. This was Countrywide's first reported loss in 25 years. The lender, however, said that as a result of restructuring, it expected to report profitable earnings for the fourth quarter of 2007 and in 2008. Countrywide's chairman attributed the loss to “unprecedented disruptions” in the mortgage and housing sectors. Fitch responded to Countrywide's earnings announcement by stating that it would continue to review the lender's rating, which was BBB+.
According to American Banker (1/14/2008), Bank of America's $2.8 billion stock purchase of Countrywide would allow the bank “to accomplish its goal of becoming a mortgage powerhouse quickly without paying anything close to premium.” The transaction was done at a steep discount: Countrywide's market value was estimated at about $30 billion one year earlier. Bank of America's CEO said he would undertake a review in order to determine whether Bank of America will retain the Countrywide brand and name in the near future. The integration of Countrywide and Bank of America is expected to result in the loss of 7,500 jobs.
CASE STUDY TWO: NORTHERN ROCK2
Event Summary
In a reflection of jittery nerves concerning market conditions, hordes of Northern Rock PLC's customers lined up in front of the mortgage lender's branches on September 14, 2007, in an attempt to withdraw money from savings accounts. The run on the bank occurred shortly after the Bank of England announced that it would provide emergency cash to the third-largest mortgage lender in the United Kingdom. The bailout, which was the first of its kind since 1995, was necessary after Northern Rock announced that it was unable to issue new loans to borrowers. Northern Rock ultimately borrowed an estimated £25 billion from the Bank of England. Two serious bids were later filed to acquire the bank, but in the end it was nationalized by the British government. Two years later the U.K. government proposed a plan to split the bank into “good” and “bad” banks, and to sell the profitable entity to a potential acquirer.
Event Details
Northern Rock was the third-largest mortgage lender in the United Kingdom, with 1.4 million retail deposit accounts, 76 bank branches, and 800,000 mortgage borrowers. By 11 A.M. on September 14, 2007, depositors were lined up outside branches in London. By the next day, Northern Rock had seen an estimated $2 billion flow out of its accounts. This followed on the heels of a previous run on a mortgage lender's savings bank that was experienced in California by Countrywide Financial.
Northern Rock was the first major British financial institution to find itself in a liquidity crunch since the start of the subprime credit crisis in the summer of 2007. Some of its troubles were attributed to reliance on funding from the capital markets—both through securitizing mortgage loans and through borrowing money from the issuance of short-term debt. The bank was not considered to be a reckless lender. It had a good credit record with only 0.47 percent of its loans in arrears. This was about one-half the average rate for British mortgage lenders. At the same time, the bank was known for issuing mortgages for 130 percent of the value of the underlying property; this allowed first-time buyers to enter the housing market but also exposed the lender to unsecured loans.
It was Northern Rock's growth strategy, with a reliance on capital market financing rather than funding based on customer deposits, that led to difficulties. Most banks balance their funding more equally between customer deposit accounts and capital markets. The bank was well diversified in its capital market sources of funding; its major vulnerability was associated with the unlikely prospect of an entire shutdown of the wholesale lending markets. Unfortunately, Northern Rock faced these unusual conditions in the summer of 2007.
Northern Rock had launched its securitization program in 1999 as a way of boosting its share of the U.K. mortgage market through a program named Granite. Granite was designed to raise money by securitizing Northern Rock's loans and to provide liquidity and funding so that it could finance new mortgages. The Granite program was at the heart of Northern Rock's problems. The Granite strategy involved the bundling of mortgages and the subsequent issuing of bonds. Funds flowed into Granite from what Northern Rock collected in interest payments from its mortgage customers.
Northern Rock's reliance on securitization allowed it to initiate a greater number of mortgages than if it relied more heavily on its modest depositor base. When the market for such securitized products dried up in the summer of 2007, Northern Rock found it difficult to continue writing new mortgages. And without the ability to issue new mortgages, Northern Rock was unable to continue financing Granite, which relied on the interest income from mortgage payments to pay out securitized notes as they came due. And if the trust was not provided with sufficient funding from new mortgages, certain triggers could be hit that were designed to protect borrowers. By the end of June 2007, Granite contained £47.8 billion in mortgages.
Once news of Northern Rock's troubles led to a run on its bank, the Bank of England, the government, and the lender quickly assured all those impacted that their funds were safe. All three parties moved to explain that a liquidity crunch and difficulty with obtaining short-term cash is very different from actual insolvency. The news of Northern Rock's bailout led to a 33 percent drop in the company's share price at the closing of the day on September 14, 2007. By Monday, September 17, the bank's shares plunged another 35 percent. The bank's market value on September 17, 2007, was estimated to be £1.1 billion. It had been estimated to be worth £5.2 billion in the spring of 2007.
Northern Rock was believed to be a takeover candidate. By the weekend of September 22, 2007, the media reported that at least 12 European banks were approached concerning an acquisition of Northern Rock; all the approached banks allegedly declined to make an offer. The banks that were approached were reportedly hesitant to take Northern Rock's £100 billion in mortgages onto their own books. Richard Branson and a consortium of financiers approached Northern Rock in October 2007 with a proposal to invest US$2 billion in the failing bank and rename it Virgin Money.
By late October 2007, the Bank of England had lent Northern Rock an estimated £25 billion. This would make any future acquisitions difficult. The Bank of England's loan to Northern Rock was at a “punitive rate” in order to protect against any moral hazard associated with a bailout. Northern Rock's additional option included a gradual winding down with a transfer of deposits to other banks. It was possible that if circumstances became dire enough, a token sale would be organized, as was the case with Barings PLC in March 1995. The Bank of England later suggested a plan to swap the loan for bonds that could be issued to the public.
In the end, only the Virgin-led consortium and a group comprised of the bank's board of directors and management team filed official offers for Northern Rock. The U.K. government determined in February 2008 that neither offer was in the best interest of the bank, its customers, and the British taxpayer. The bank was nationalized on February 17, 2008.
Northern Rock's shareholders lost the entire value of their holdings after the bank was nationalized. A group of aggrieved shareholders sought compensation from the British government for losses associated with their Northern Rock investments. The lawsuit, which was filed on behalf of SRM Global, RAB Capital PLC, and a group of private investors, was dismissed by a Court of Appeals in London in July 2009. The group of former Northern Rock shareholders said that they intend to file an appeal with the House of Lords. SRM was Northern Rock's largest shareholder and held 11.5 percent of outstanding common shares, while RAB held 8.2 percent.
Control Failings and Contributory Factors
Corporate/Market Conditions
Northern Rock was alleged to have been “unusually reliant” upon bond markets in order to raise money for underwriting new mortgages. In the aftermath of the collapse of the U.S. subprime market, it became increasingly difficult for mortgage lenders such as Northern Rock to borrow money from global debt markets. This led to difficulty with funding newly underwritten mortgages and to the Bank of England's emergency bailout.
Undertook Excessive Risks
Analysts conjectured that Northern Rock's overreliance on the bond markets in order to finance mortgage lending activities was a high-risk strategy. BusinessWeek (2007) commented that Northern Rock “thrived on—and then was brought down by—its innovative business model,” which relied on securitization of its underwritten mortgages, and capital markets financing, to grow its business. It obtained an estimated 77 percent of its financing from the capital markets. It was more typical for large lenders to obtain closer to 50 percent of their financing in this way. By June 2007, the former Newcastle Building Society had an approximately 19 percent market share of the British mortgage sector. But by September 2007, its various strategies to finance those mortgages were failing at seemingly the same time.
Corrective Actions and Management Response
In a conference call held on September 14, 2007, Northern Rock CEO Adam Applegarth stated, “Frankly, life changed on August 9th, virtually like snapping a finger. Watching liquidity disappear on a global basis has been astonishing.” He further commented that when he was faced with a liquidity crunch, “it was the entirely logical thing to approach the Bank of England.” Mr. Applegarth resigned from Northern Rock in November 2007; his £760,000 contractual payout and £2.6 million pension came under criticism at the time. Some critics characterized the payments as a “reward for failure.”
The bailout would “help Northern Rock to fund its operations during the current period of turbulence in financial markets,” the Bank of England, the U.K. Treasury, and the Financial Services Authority (FSA) said in a joint statement. The bailout came just days after Bank of England Governor Mervyn King said in a letter to the Treasury Committee of the House of Commons that any such pumping of cash into the system “undermines the efficient pricing of risk by providing ex-post insurance for risky behavior.” He warned of the possible moral hazard involved with such bailouts when he said they “encourage excessive risk-taking and sow the seeds of a future financial crisis.”
The Bank of England relented from its strong abhorrence of bailouts when it rescued Northern Rock, due to the lender's size and importance to the markets. The bank released a statement saying that it decided to lend funds to Northern Rock because “the failure of such a bank would lead to serious economic damage.” The bank further stated that the prospect of “moral hazard” was mitigated by the charging of a “penalty rate” attached to the funds it lent to Northern Rock. The Bank of England further noted that despite its concern for “excessive risk-taking,” it continued to be the lender of last resort for troubled banks.
Northern Rock did not move to stem the run on deposits by enforcing withdrawal limits on customers immediately following the Bank of England's announcement that it would provide liquidity to the mortgage lender. The Financial Services Authority, in an extremely rare public comment, said, “If we believed Northern Rock was not solvent, we would not have allowed it to remain open for business” (2007).
Northern Rock's new management team, under the guidance of CEO Ron Sandler, issued a provisional reorganization plan in late March 2008 that emphasized three goals: repayment of the Bank of England loan, release of the government's guarantee agreements, and, ultimately, a return to the private sector. During what the bank called its temporary public ownership status, it pledged to maintain competitive practices, including refraining from promoting government guarantee arrangements, and limiting its market share to levels below what they historically had been (as the number three mortgage lender in the U.K. market).
Lessons Learned
Some analysts speculated that a run on a bank of the type that was experienced in September 2007 by Northern Rock was inherently bad for the system, because it created “jitters” concerning the stability of all banks. BusinessWeek (2007) commented that the run on the bank “can only damage confidence in the previously solid British economy.” Simon Adamson, an analyst with Credit Sights, commented that this was “an alarming development—this is not a small niche institution.” Adamson also stated in the article that it would be prudent to investigate which other banks and lenders rely so heavily on the capital markets for their liquidity. Northern Rock obtained 77 percent of its financing from the capital markets; its competitor Bradford & Bingley obtained 58 percent of its funds in this way.
The United Kingdom was potentially more vulnerable to bank runs than the United States, due to the fact that a smaller portion of customer assets was protected if a financial institution became insolvent. Deposits were insured by the Financial Services Compensation Scheme, which protected up to £31,700. The first £2,000 was covered completely, while 90 percent of the next £33,000 was insured. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures $100,000 per customer account (up to $250,000 through 2013). The U.K. government later offered to guarantee 100 percent of up to £35,000 in new deposits held with Northern Rock.
Chancellor of the Exchequer, Alistair Darling, said at a Labor Party conference that there were “lessons to be learned” associated with global supervision of financial institutions (2007). The British Bankers’ Association offered pragmatic advice when it commented: “Everyone should calm down and refrain from making simplistic comments in a very complex area which just causes unnecessary worry and concern” (Hosking et al. 2007).
The Financial Services Authority came under criticism for the role it played in regulating and supervising Northern Rock. The FSA released what the Economist (3/28/2008) called a “surprisingly frank report on its own manifold shortcomings in supervising Northern Rock.” The report, which was released on March 26, 2008, covers the months before Northern Rock collapsed and delineates a series of supervisory lapses. The lapses included a failure to keep records of meetings, and a group of supervisors who oversaw Northern Rock that reported into the FSA's insurance department. Over the course of three years, the team moved a number of times, and overall responsibility for supervision of Northern Rock changed three times. The report calls for a number of reforms in how the FSA supervises entities.
Aftermath of Event
The Financial Times reported in July 2009—almost two years after Northern Rock initially failed—that it was operating with capital ratios below the minimum that are required by regulators. The bank said that it planned to address the deficiency through a recapitalization plan that would split it into a “good bank” and a “ bad bank.” The bad bank would serve as a holding entity for non-performing mortgage loans, while the good bank would hold £20 billion of retail deposits and healthy loans. The good bank is likely to be sold to an acquirer. Richard Branson expressed continuing interest in acquiring Northern Rock on behalf of his Virgin Money subsidiary. The plan is subject to approval by the European Commission, which has voiced concern about the “aid measures included in the new restructuring plan” and their “compatibility with the common market.”
The Financial Times reported in May 2009 that a group of regulators in the U.K., including the Financial Services Authority, the Bank of England, and the Treasury, conducted secret “war games” in 2004 with the mission of determining how vulnerable banks were to systemic risk. Northern Rock and HBOS were identified as potentially susceptible if foreign banks withdrew funding from the wholesale lending markets that they relied upon. The Financial Times reported that although the regulators reached the conclusion that both banks were reliant on inherently risky business models, they lacked the power to “force the lenders to change their practices.” The problem appeared to go unaddressed until the wholesale lending markets dried up in 2007 and “the war game's findings proved eerily prescient.”
NOTES
* This information is the sole property of Algorithmics Software LLC and may not be reprinted or replicated in any way without permission.
1. Algo First database of operational risk case studies.
2. Ibid.
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