Knudson1

AshleyKnudson
InvestigativeReportREVISION
JoshTerry_English2010

TheUSFinancialHoodwink
Thefinancialcrisisof20072008typicallysynonymouswithhousingmarketfailurein
redflashinglightsandisidentifiedasthemortgagecrisiswheretherewereasmanyhomeless
peopleastherewereemptyhomes.However,thisisatypicaltypeIIerror.Thehousingmarket
hasestimatedallinlossesbetween$750billionand$2trillion(Adelson).Thesenumbersseem
outrageousbuttheycomenowhereclosetotheballparkofexplainingtheestimatedlossduring
thecrisiswhichfallsbetween$5trillionand$15trillion.(Adelson)Themortgageindustryissue
mayhavebeenthestrawthatbrokethecamel'sbackandsenteverythingtumblingdownhillbut
thetrueculpritthatlayunderneathallthefalsefinancialpackagingisthebehaviorofthe
financialfirmsaviduseofhighleverageandstrongriskappetite(Adelson).
TheeffectonalloftheAmericansocietywasfeltthemostinaphysicalandtangibleway
throughthefailureofthehousingmarket.Thelargestpurchaseofanypersonslifeistypically
theirhome.Homeloansareboughtandsoldandpackagedandrepackagedandmodifiedand
refinancedanddefaultedandsometimestheyareevenpaidinfull.Mortgagesareamajor
investmentmarketandinvestorsflocktothemarketwhenitseesincredibleincreaseandpromise
ofawealthyreturn.Averagehousepriceshaddoubledbetween1997and2005,andmany
peopleexpectedtheincreasestocontinue.Thenthehousingmarketturnedaround,andhouse
pricesdeclinedby18percentfrommid2006tomid2008(Trescott).Thiswasthebeginningof
thelargesthousingcrisisAmericahaseverseenhomepricesincreaseandthemarketexpands

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andinvestorsbuyandbuyallthepromisingmortgagesnotknowingtheyareattheirprimeand
wouldfallfasterthantheyrose.
Theintense,bittereffectrockedtheeconomywhenacontinuouslyincreasingnumberof
homeownerscouldnotmaketheirmonthlymortgagepayment.Majorfinancialgiantswere
failing,withassetsandliabilitiesworthhundredsofbillionsofdollarsthesemassiveinstitutions
couldnolongerpaytheirbillsorfulfilltheirdebts.TheUnitedStatesTreasuryandFederal
Reservesteppedinondifferentoccasionstoimplementthesituationastomakesureitwouldnot
worsen(
U.S.SuesBankOfAmericaForMortgageFraud
).Thedamagewasjustbeginningto
unveilandthefinancialruinofthesecompanieswasalreadylooming.Atthispointintime,stock
marketpriceswerefollowingcloselybehindhomeprices,fallingfasterthantheyhadrisenor
wouldcomebackfromthedepthsofaneconomicdepression.
BymidOctober2008,theU.S.Congresssteppedinonthesituationanddeclaredthe
issuanceofupto$700billiontobepaidbackintotheeconomybypurchasingupsetassets,
includinghomeloans,andtoinsertcapitalbackintothetumultuous,defaultfilledbankingand
financialindustries(Trescott).Asdefaultsonhomemortgageloansroseatarapidpace
throughouttheyearandcrestedatthistime,thesedefaultsandfailuresinvolvingbanksandother
marketparticipantscameaboutduetotheplummetingpricesinthehousingmarket.TheUnited
Statesfounditselfdivingintoacrisisthatwouldthoroughlyrockthefoundationsofitseconomy
andplunderthefaithcitizensoncehadinthegovernmentandinstitutions.Theeconomicmarkets
including
housingmarkets,mortgagemarkets,andfinanceandcreditmarketswouldbeshaken
totheirverycore,disruptingfinancialstabilityandspiralingoutofanyonescontrol.

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Anincreasinglyapparentwakeupcallduringthistimewasthefailureafterfailureof
majorfinancialinstitutions.Thegovernmentwatchedaslargeplayersinthemarketsandbanking
industriesdeclinedandwitheredawayandtookastandtostepinandinsertsupervisionfor
majoracquisitions,mergers,buyoutsandabsorption(
U.S.SuesBankOfAmericaForMortgage
Fraud)
.TheFederalReserveassistedtheJuly2008mergerofBearSterns,aprominent
investmentfirm,intoJPMorganChase.AcompletelyobliteratedCountrywidewasrescuedby
BankofAmericawithCountrywidesmortgageholdersbenefitingbybeingofferedbetterrates
anddealswithBankofAmericaMerrilLynchwasalsoabsorbedbyBankofAmerica.The
FederalDepositInsuranceCorporationtookmattersintoitsownhandsin2008whileoverseeing
theforcedmergerofWashingtonMutualwithJPMorganChasethiswouldbethelargestbank
failureinhistorywith$300billioninassets.ThelargestbankruptcytobefiledinAmerican
historywasbyLehmanBrotherstheinvestmentbankingfirmclaimedbankruptcywith$630
millionintotalassets(
U.S.SuesBankOfAmericaForMortgageFraud)
.
TheU.S.governmentsuedBankofAmericaforpenaltyfraudoverbadmortgagessold
fromCountrywideFinancialCorp.
USDistrictJudgeJedRakoffinManhattanruledafterajury
lastOctoberfoundthesecondlargestUSbankliableforthesalebyCountrywideofdefective
loanstogovernmentcontrolledmortgagecompaniesFannieMaeandFreddieMac(Reuters).
TheonlyotherindividualchargedintheCountrywidefrauddealwasexecutiveRebecca
Mairone,whoistopay$1milliononaccountofherleadingroleinthefraudulentscheme.
However,thegovernmenthasnotbroughtcriminalchargesoverloanpracticesagainstMairone
orthecompanyeventhoughitisspeculatedtobethebasisforthehousingindustrycollapseof
2008(Reuters).

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TheallegationscenteronaprocessusedbyCountrywidecalledthehustle,andtheidea
behindthisprocesswastomovehighvolumesofmortgagesoffofCountrywide'sbooks
atareallyhighspeed.ThegovernmentsaysthatevenCountrywide'sowndocumentssaid
thoseloansweresupposedto,quote,moveforward,neverbackward.Andprosecutors
saytomoveandsellthesemortgagesasquicklyaspossible,theyremovedquality
controls(
U.S.SuesBankOfAmericaForMortgageFraud.").
BankofAmericaandCountrywideturnedaroundandsoldthesedefectiveloanstothe
governmentbackedprivateagenciesFannieMaeandFreddieMac.Theagenciesarethelargest
inthebusiness,duetothis,theirresourcesforrigorousinspectionofloanstheybuyislittleto
none.Thefirmsrelyheavilyonthestandardsofthebankingandfinanceindustrytoholdthe
loansuptopar.Forwhentheybuythebadloansfrombanksandpackagethemuptosellto
investorstheyareunknowinglyburyingandcreatingadeeperstringofbadinthefinancial
economywithoutevenknowingit.
Somespeculatethatthefinancialcrisisof2008couldhavebeenavoidedifthechecks
andbalancesofthemortgageindustryandthemajorgiantsinithadbeenmoreheavily
controlledandcloselywatched.Thelossthatwasincurredandwillbeincurredisfartoogreaton
fartoolargeofascaletomeasurewhichfactorwastrulyresponsibleforthemostdevastating
rolethateffectedtheworldandtheUSeconomy.
LossesonU.S.residentialmortgageloansare
toosmalltoexplainthemagnitudeofthe2008financialcrisis.Totallosses,includingbothlosses
realizedtodateandthoseyettoberealized,shouldfallintherangeof$750billionto$2trillion.
(Adelson).ThemagnitudeofthelosswithintheUSandonaglobalscalemeasuresthatthe
residentialmortgageindustryfraudandfailurecouldnotbethesoleorevenamajorcontributor

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tothecrisis.Thehighlypublicizedfailures,mergers,fraud,andbankruptcyoftheselargefirms
arethefacepeopleassociatewithwhathappenedduringthishistoricaltime.Theabsolute
formulaforwhattookplaceduringthisscandalisjustthishighleverageandstrongriskwere
instantaneouscausesofthecrisis.

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WorksCited

"U.S.SuesBankOfAmericaForMortgageFraud."
AllThingsConsidered
24Oct.2012.
LiteratureResourceCenter
.Web.5Oct.2015.

Adelson,Mark."TheDeeperCausesOfTheFinancialCrisis:MortgagesAloneCannotExplain
It."JournalOfPortfolioManagement39.3(2013):1631.BusinessSourcePremier.Web.5Oct.
2015.

Reuters.BankofAmericatopay$1.27BforHustlemortgages.2015NYPHoldings,Inc.
(2014):WordPress.com.Web.5Oct.2015.

Trescott,B.Paul"FinancialCrisisOf2008."SalemPressEncyclopedia(2014):Research
Starters.Web.5Oct.2015.