Lehman Had Long Relationship With Suspect Mortgage Brokers

Memo from Lehman executive questioned the mortgage firm's ethics.

Sept. 15, 2008— -- Lehman Brothers was identified eight years ago by ABC News and the New York Times as doing business with a company suspected of writing fraudulent mortgages and cheating consumers, but Lehman Brothers company defended its ongoing relationship as appropriate.

Lehman Brothers' collapse today is blamed, in large part, on its heavy involvement in sub-prime mortgage investments dating back to that time.

In a joint investigation in March 2000, 20/20 and the New York Times revealed how Lehman Brothers helped to "bundle" or package millions of dollars worth of mortgages arranged by California-based First Alliance Mortgage, accused by the Federal Trade Commission and several state attorneys general of defrauding homeowners through "predatory lending."

(Click here to watch the 20/20 report.)

Watch 20/20 on Friday for the full report.

The company continued to do business with the broker even after a Lehman Brother executive wrote a memo in which he expressed misgivings about the firm's lack of ethics.

On the 20/20 broadcast, New York Times reporter Diana Henriques said Lehman Brothers became, in effect, First Alliance's Wall Street enabler giving them "cachet on Wall Street" and "making hundreds of millions of dollars available to this country to continue to make loans."

Lehman Brothers helped invent the financing of sub-prime mortgages from companies like First Alliance by taking over the individual mortgage loans and packaging them as high-interest paying investment vehicles for Wall Street, known as "securitization."

When huge numbers of those sub-prime loans went into default, it triggered the financial crisis that continues to shake the country.

In March 2002, the Federal Trade Commission announced a $60 million settlement with First Alliance charging that "First Alliance and its chief executive officer violated federal and state laws in making home mortgage loans to customers."

The complaints against First Alliance alleged the company marketed its mortgages "through a sophisticated campaign of tele-marketing and direct mail solicitations."

The ABC News/ New York Times investigation revealed that Lehman Brothers was aware of the allegations and state investigations of First Alliance but continued to do business with them despite the ongoing government investigations and numerous civil lawsuits.

According to the Orange County Register, First Alliance went out of business after the FTC settlement.

A 2003 jury verdict against First Alliance also held Lehman Brothers partially responsible, according to the paper, "because it represented First alliance despite a memo written by one of Lehman's executives that called First Alliance a 'sweatshop' where employees 'leave your ethics at the door'."

Lehman Brothers' chairman Richard Fuld declined to be interviewed in 2000, but in a statement Lehman Brothers said "it is an underwriter and not a regulator." It also said that it believed First Alliance had stepped up compliance. It was two years later, that the FTC took its enforcement action.

Homeowners who said they had been defrauded by First Alliance, alleging they were tricked into paying exorbitant fees and stuck with higher interest rates than they had been promised, questioned Lehman Brothers' role at the time.

"If they knew anything of what was going on, they are just as guilty," said Bernae Gunderson who said a First Alliance telemarketer had tricked her. A tape recording of the telephone conversation she made proved to be a key piece of evidence against First Alliance.

Click Here for the Investigative Homepage.

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