The Housing Bubble, Still Burst
With the summer drawing to an end, we figure it's time to update the three-part series we published in June on how the housing bubble grew and popped.
The series, recalls reporter Zachary Goldfarb, examined excesses in mortgage lending, the exotic Wall Street securities that masked the real risks of the bubble and made the bust so crushing, and how the downturn touched the lives of ordinary Americans. The report also looked at the government's response -- first restrained, then aggressive.
So what's happened in the meantime?
Banks: A number of small, medium and large banks have failed, many of them because of weakness in their portfolio of residential and commercial real estate loans. Most notably, California-based IndyMac experienced a run earlier this summer and the federal government was forced to take it over. In all, nine banks have failed. Many analysts are expecting more to fall. The government reported last week that "late loan payments and defaults by commercial and residential developers have soared to the highest levels since the early 1990s, threatening the health of some small banks."
Structured finance: Wall Street's top banks have been struggling with a variety of exotic securities. In some cases, regulators have forced them to allow investors to return a type of security, known as an auction-rate security, that they had believed to be safe. There has been concern on Wall Street about famed investment house Lehman Brothers. Merrill Lynch has been selling collateralized debt obligations, fancy securities based on layers of mortgages and other debt, for 22 cents on the dollar to rid itself of the plagued investments. Federal agents arrested and are building a case against former employees of hedge funds associated with felled investment bank Bear Stearns. The collapse of those hedge funds helped spark the credit crunch.
Fannie Mae and Freddie Mac: The government-charted mortgage finance companies, which had bought pools of subprime mortgage securities to fulfill their mandate of expanding national homeownership, have suffered blistering losses, with some analysts predicting that the government will be forced to bail them out. Congress has given the Treasury the authority to do whatever it needs to save Fannie and Freddie, including buying billions of dollars of their shares or nationalizing them. Treasury Secretary Hank Paulson hopes to take such measures only in the most severe scenario.
Alan Greenspan: The former Fed chair has been working hard to defend his legacy, trying to counter claims that a period of low rates and lax regulation led to excess lending. He has written commentaries, most recently in the Financial Times, in which he describes the underpinnings of the financial crisis and concludes that the crisis must have been "unanticipated." He also has given a front-page interview to the Wall Street Journal and is updating his popular book, An Age of Turbulence, to reflect the crisis.
Ben Bernanke and the Fed: After seven substantial rate cuts over eight months to ease tight credit market and spur lending, the Fed has a new boogeyman on its mind: inflation. With energy and food costs skyrocketing, the Fed has been contemplating raising rates to slow rising prices, though it has so far resisted doing so because of the fragile state of the overall economy. Meanwhile, Bernanke has been pushing for broader powers to oversee the inner-workings of the financial system.
Housing market and mortgage loans: Many analysts believe that the worst problems with subprime loans--made to people with inferior credit history--may have now passed. But they are concerned about growing defaults and delinquencies with better quality loans, primarily a type called Alt-A. Alt-A loans were made to people with better credit histories, but did not require proof of income or employment. Overall, housing prices have continued to fall, and most analysts believe they must fall more before a recovery in the housing market. A bright spot, however, is that sales of new homes are stabilizing.
The Treasury: The point man at the Treasury for the financial crisis, under secretary for domestic finance Robert Steel, has abandoned ship to lead Wachovia, a big national bank ailing from subprime losses.
Global markets: Through much of the summer, the global impact of the credit crunch continued to grow. The International Monetary Fund said recently that banks have already written down nearly $500 billion of bad loans and are likely to suffer more -- perhaps $1 trillion.
By The Editors |
September 3, 2008; 8:10 AM ET
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