American home prices peaked in 2006. Two years later Lehman Brothers was bankrupt and Congress was voting on $700 billion.
Nearly every line here comes from the Financial Crisis Inquiry Report, the court examiner’s report on Lehman, and the Federal Reserve’s and Treasury’s own words. A charge is an accusation, not a finding of guilt: where a case ended, the story says how. The commission could not agree on why it happened, so the majority and those who dissented each get their say.
2003
A lender makes a home loan and sells it. The loan goes into a pool with many others, so a few defaults hardly matter. The pool is cut into slices and sold to investors. Everyone along the way earns a fee.
Bankers often compared it to a waterfall; the holders of the senior tranches — at the top of the waterfall — were paid before the more junior tranches.
2006
In Sacramento, prices rose nearly two and a half times in five years. Subprime loans, made to borrowers with weaker credit, went from 8% of new mortgages in 2003 to 20% in 2005. Lenders pooled them and sold them to investors.
67%Rise in average U.S. home prices in eight years, to a high of $227,100 in early 2006
average home prices nationwide climbed, rising 67% in eight years by one measure and hitting a national high of $227,100 in early 2006.
May 1998
In May 1998 Brooksley Born’s agency said it was taking a new look at derivatives traded outside any exchange. Treasury Secretary Robert Rubin, Fed Chairman Alan Greenspan and SEC Chairman Arthur Levitt objected the same day, and asked Congress for a moratorium on what the agency could do.
We have grave concerns about this action and its possible consequences.
23 Mar 2001
In 2001 Edward Gramlich spoke of “disquieting reports of abusive lending practices.” He and Sheila Bair considered seeking rules, but he thought the Fed “would not support the effort.” The commission’s majority later wrote: “there were warning signs. The tragedy was that they were ignored or discounted.”
Some of these practices are clearly illegal and can be combated with legal enforcement measures.
2006
From 2000 to 2007 Moody’s rated nearly 45,000 mortgage securities triple-A, its top grade. Of those it rated so in 2006, it cut 73% to junk. “This crisis could not have happened without the rating agencies,” wrote the majority. Moody’s chief executive told the commission he saw no “particular difference in culture” after the firm was spun off.
30 a dayMortgage securities that Moody’s rated triple-A, every working day of 2006
In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every working day.
Jan 2008
In January 2008 Bank of America said it would buy the ailing lender Countrywide. The next year the SEC charged its former chief executive, Angelo Mozilo, with securities fraud. A charge is an accusation, not a finding of guilt.
Angelo Mozilo privately described one Countrywide product as 'toxic,' and said another's performance was so uncertain that Countrywide was 'flying blind.'
16 Mar 2008
High-risk loans went bad, and the bonds made from them fell. On Sunday 16 March 2008 Bear Stearns accepted an offer from JPMorgan Chase. The New York Fed helped arrange it, and the Federal Reserve approved the financing.
On March 13, 2008, Bear Stearns notified the Federal Reserve that it expected that it would not have enough funding or liquid assets to meet its obligations the following day
7 Sep 2008
Two government-sponsored companies stood behind $5.3 trillion of mortgage assets. On 7 September 2008 the government took them over. Treasury Secretary Henry Paulson blamed “the inherent conflict and flawed business model embedded in the GSE structure,” and the housing correction.
75 to 1What Fannie Mae and Freddie Mac owned or guaranteed, against their capital, end of 2007
Combined, Fannie and Freddie owned or guaranteed $5.3 trillion of mortgage-related assets at the end of 2007 against just $70.7 billion of capital, a ratio of 75:1.
14 Sep 2008
One week later, talks ran through the weekend over Lehman Brothers. At 8:00 on Sunday morning, Barclays told Paulson that the British regulator had declined to approve its deal. Lehman filed for bankruptcy at 1:45 a.m. on Monday. That day the Dow fell more than 500 points.
In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution.
2008
In an ordinary repo, a firm raises cash by selling assets it must buy back days later. The court’s examiner found that Lehman had not disclosed using one kind of repo to take about $50 billion off its balance sheet at the end of two quarters in 2008.
By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet.
22 Sep 2008
Merrill Lynch sold itself that same weekend. Barclays began talks on Lehman’s U.S. brokerage right after the filing, and closed the purchase on 22 September. Why no rescue? Bernanke said Lehman’s troubles “had been well known for some time.” John Thain told the commission: “There was a criticism of bailing out Wall Street.”
Merrill’s Thain made it through the Lehman weekend by negotiating a lifesaving acquisition by Bank of America, formerly Lehman’s potential suitor.
16 Sep 2008
AIG had insured other firms against losses on debt, much of it mortgage-related, through credit default swaps: $54 billion of the top slices in 2004 and 2005, up from $2 billion in 2003. A “disorderly failure of AIG,” the Fed said, could add to market fragility. So the day after Lehman, it lent.
$85 billionFed loan to AIG, one day after Lehman fell, for a 79.9% stake
authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act.
3 Oct 2008
The Treasury asked for up to $700 billion to buy troubled assets. On 29 September the House said no, 228 to 205, and the Dow plunged 778 points. On 3 October it said yes, 263 to 171, and President Bush signed the law.
Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.
Oct 2009
Unemployment went from 5 percent to 10. Home prices fell about 30 percent, and the S&P 500 fell 57 percent. The economy shed 3.6 million jobs in 2008, the largest annual plunge since record keeping began in 1940. Nearly $11 trillion in household wealth vanished, the commission wrote.
About four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosure process or are seriously behind on their mortgage payments.
21 Aug 2014
Mozilo paid $67.5 million to settle with the SEC in 2010, neither admitting nor denying the allegations. Goldman Sachs paid $550 million that year, also without admitting or denying them, and acknowledged that its marketing materials for one deal “contained incomplete information.” Bank of America’s settlement covered Countrywide and Merrill Lynch.
the Department of Justice has reached a $16.65 billion settlement with Bank of America Corporation – the largest civil settlement with a single entity in American history
21 Jul 2010
The Dodd-Frank Act set out “to end ‘too big to fail’” and “to protect the American taxpayer by ending bailouts.” It put tougher rules on firms whose failure could threaten the system. Few congressional Republicans supported it.
It was a crisis born of a failure of responsibility from certain corners of Wall Street to the halls of power in Washington.
Jan 2011
A commission of ten was asked why it happened, and it could not agree. Six signed the report, among them Brooksley Born. They blamed failures in regulation and supervision, and “collapsing mortgage-lending standards.”
We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire.
Jan 2011
They put a credit bubble first. China, other developing countries and the oil producers built up surpluses, and “loaned these savings to the United States and Europe, causing interest rates to fall.” Neither the Community Reinvestment Act nor the end of Glass-Steagall, they wrote, “was a significant cause.”
The majority’s almost 550-page report is more an account of bad events than a focused explanation of what happened and why.
Jan 2011
Peter Wallison filed alone. U.S. housing policy, he wrote, led to “27 million subprime and other risky loans — half of all mortgages in the United States.” So one commission gave three answers, and each is here in its own words.
I believe that the sine qua non of the financial crisis was U.S. government housing policy