Although not required by law to bail out Bear, Fannie or Freddie, they did so to avoid disaster-only to be castigated by fellow Republican believers in deregulation. But with a crisis upon them, Bush and his lieutenants, particularly Treasury Secretary Paulson and Federal Reserve Chair Ben Bernanke, decided not to bet on leaving the markets unfettered. Bush was a conservative Republican who, along with most of his appointees, believed in the virtue of deregulation. In September, the treasury announced it would rescue the government-supervised mortgage underwriters almost universally known as Fannie Mae and Freddie Mac.
treasury and the Federal Reserve system brokered, and partly financed, a deal for its acquisition by JPMorgan Chase. In March 2008, the investment bank Bear Stearns began to go under, so the U.S. The Bush administration, criticized for earlier bailouts, cut Lehman loose (Susan Watts/NY Daily News Archive/Getty Images Congress gave them one way to do so in 2000, with the Commodity Futures Modernization Act, deregulating over-the-counter derivatives-securities that were essentially bets that two parties could privately make on the future price of an asset.įormer employees of f inancial giant Lehman Brothers leaving the New York City headquarters. These nimbler firms, crowded by bigger brethren out of deals they might once have made, now had to seek riskier and more complicated ways to make money. Investment banks jumped neck-deep into risk Most of what remained was repealed in 1999 by act of Congress, allowing big commercial banks, flush with the deposits of savers, to lumber into parts of the financial business that had, since the New Deal, been the province of the smaller, more specialized investment banks. Over several decades, policymakers eroded Glass-Steagall separations. This steady state persisted until the latter 1970s, when politicians hoping to jolt a stagnant economy pushed deregulation. For decades afterward, such restrictive regulation ensured, as the adage went, that bankers had only to follow rule 363: pay depositors 3 percent, charge borrowers 6 percent, and hit the golf course by 3 p.m. the Glass-Steagall Act), they separated these newly secure institutions from the investment banks that engaged in riskier financial endeavors. Then, with the Banking Act of 1933 (a.k.a. First, they insured commercial banks and the savers they served through the Federal Deposit Insurance Corporation (FDIC). They knew only that the rating agencies said it was as safe as houses always had been, at least since the Depression. The ultimate mortgage owners would often be thousands of miles away and unaware of what they had bought. Lenders would sell these mortgages onward bankers would bundle them into securities and peddle them to institutional investors eager for the returns the American housing market had yielded so consistently since the 1930s. The salesmen could make these deals without investigating a borrower's fitness or a property's value because the lenders they represented had no intention of keeping the loans. Mortgages were transformed into ever-riskier investments Then the salesmen were gone, leaving behind a new debtor holding new keys and perhaps a faint suspicion that the deal was too good to be true. Many salesmen didn’t ask borrowers for proof of income, job or assets.
Around the country, armies of mortgage salesmen hustled to get Americans to borrow more money for houses-or even just prospective houses. At about the same time, home prices doubled. According to the Final Report of the National Commission on the Causes of the Financial and Economic Crisis of the United States, between 20, mortgage debt rose nearly as much as it had in the whole rest of the nation's history. Fast forward a half-century or so, to when the mortgage market was blowing up.
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