Pointing the Finger

With Wall Street's backing, lenders mass marketed mortgage products that disguised onerous prepayment penalties and teased borrowers with low initial payments that later soared. No money down mortgages and so-called "liar loans," obligations that didn't verify a borrower's income, became common fare.

Wall Street grabbed loans pooled and packaged into securities that were sold to pensions, hedge funds and global investors.

But this process, called securitization, may have put the regulation of the subprime mortgage industry in the hands of the investment banks and ratings agencies, critics charge.

"Wall Street and rating agencies, rather than state regulators or even lenders, largely decide what types of borrowers obtain subprime loans and how the loan products offered to borrowers are designed," Kurt Eggert, a Chapman University law professor, told a Congressional committee earlier this year.

The banks that securitized the debt didn't worry about escalating late payments because they didn't hold the loans; the risk was spread thinly over a diverse group of investors.

And Wall Street's demand for subprime loans emboldened mortgage brokers, who were rewarded for drumming up business and pushing volume through the pipeline.

INVESTORS REACHING FOR YIELD

Investors also are taking it on the chin. A growing number of hedge funds, investment banks and insurance companies face losses on their subprime-linked investments.

Last month investment bank Bear Stearns roiled markets after two of its hedge funds that had used billions in borrowed money to buy CDOs almost collapsed. The hard-to-value securities rarely trade but some had the highest rating: AAA.

"Have we forgotten what happened during the tech-telecom bubble days?" said Andrew Harding, chief investment officer of fixed-income at Allegiant Asset Management in Cleveland. "These products weren't transparent to me and difficult to analyze and understand and yet they got triple-A credit ratings!"