The stock market is in a tailspin after the U.S. government lost its AAA credit rating for the first time in history, raising echoes of the catastrophic Wall Street fallout three years ago.
But how did it all begin? Who were the key players? Where do regulators go from here? Here, we recount the Center for Public Integrity’s top stories on the 2008 financial meltdown and the subsequent market and government response.
Subprime mortgages underlying the road to financial ruin (May 6, 2009) – Just how did we get into this mess? Multiple factors have been cited: “blame, irresponsibility, lax government oversight, conflicts of interest and especially blind faith in a housing boom that seemingly had no end.” But fueled by subprime lending, the boom ended in bust. Borrowers took out too many loans they couldn’t afford, housing prices tanked, and by the summer of 2007, the subprime industry had all but disappeared because big banks had cut off access to credit. The government responded by promising to use taxpayer money to buy so-called “toxic” mortgage assets from banks so lending could start again. On Oct. 3, 2008, President Bush signed the $700 billion Emergency Economic Stabilization Act into law. Calls for increased regulation over the financial and housing industries would later yield stricter legislation.
Top 25 subprime lenders (May 6, 2009) – The top 25 subprime lenders accounted for nearly $1 trillion of subprime loans, about 72 percent of the high-priced loans reported to the government at the peak of the subprime market. The leader in lending was Countrywide Financial Corp, responsible for at least $97.2 billion, followed by Ameriquest Mortgage Co./ACC Capital Holdings Corp with at least $80.6 billion and New Century Financial Corp. at $75.9 billion.
A new regulatory regime (June 18, 2009) – By June of 2009, financial companies were sent a clear signal that they would be closely regulated by federal officials. President Obama signed a bill announcing the Consumer Financial Protection Agency, which would, for the first time, regulate non-bank mortgage companies.While states would still remain the “first line of defense” for supervising no-bank lenders, the agency would be responsible for enforcing major fair lending laws, including the Truth in Lending Act and the Fair Debt Collections Practices Act.
Mortgage industry racked by foreclosure scandal (Oct 7, 2010) – One of the leading causes of the financial crisis can be traced back to the mortgage market. It has been plagued by “significant levels of fraud” for the past decade and more recently, became embroiled in a foreclosure scandal involving backdated documents, false affidavits, and “rocket dockets” that push families into the street. Employees with some of the largest mortgage companies said, for instance, that they were encouraged to sign foreclosure documents without reading them or verifying information.By 2010, at least seven states began investigating the mortgage industry for questionable foreclosures.
Housing market still in tatters, with government negotiations underway (Aug 5, 2011) – A typical recovery route usually showcases the housing market as leader; taking advantage of low interest rates, the market booms and brings the rest of the economy along with it. But this time around, a glut of inventory and foreclosures has hampered the housing market to the point of “tatters.” In June, one out of every 583 housing units was sent a foreclosure notice, with some regions boasting even more shocking numbers. Recovery of the general economy may be difficult, if not impossible, while this market lags. Complicating the scenario: government officials are currently investigating the nation’s five largest mortgage services over allegations of rampant abuses in the foreclosure process, including the falsification of documents. Four of the companies—Bank of America, JP Morgan Chase & Co., Citigroup, Wells Fargo & Co.—have spent at least $8 million lobbying state and federal political campaigns since 2008. The fate of these negotiations will play a key role in the pace of economic recovery.
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