mortgage crisis
The 5 myths of the great financial meltdown: Round 2
July 5, 2012: 5:00 AM ETCritics of our analysis say Uncle Sam should have let the free markets take care of business. They tried. And they failed.
FORTUNE -- My last column, looking at five myths and misconceptions that have emerged since the financial crisis first surfaced five years ago, clearly hit a nerve. It elicited more than 500 online comments, an unusually large response. Most commenters were critical of what I wrote, which is par for the course.
The major criticism, as I determined with assistance from my colleague Omar Akhtar -- between us, we actually read all the comments -- was of my first point: that having the government do nothing was not a realistic option. Dozens of commenters said that cleaning up the mess should have been left to the private markets, which would have done things better than the Federal Reserve, Treasury, and rest of the government did.
What most of those people probably don't realize, though, and what I had no room to discuss in my last column, is that private markets took the first big swing at recapitalizing troubled financial institutions -- and struck out.
By my count, eight capital-needy U.S. companies – Citigroup (C), Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, Morgan Stanley (MS), Wachovia, and Washington Mutual -- raised a total of $93 billion from investors from late 2007 through July 2008. That's a lot of money. Much of it came from some of the best, brightest, and richest investors in the world, ranging from TPG Capital (WaMu) to Davis Selected Advisors (Merrill) to sovereign wealth funds from Kuwait and Abu Dhabi (Citi). The full list is at the bottom of this story.
Oops. Those savvy, deep-pocketed investors sustained staggering losses in the blink of an eye, as the world's financial problems rapidly worsened. After that, without government backing there wasn't going to be much private capital for troubled institutions. That's why Uncle Sam had to step in.
More: Wall Street still ignoring the fiscal cliff
The alternate complaint -- that the government should have nationalized troubled institutions -- sounds plausible too. But that strategy stood no chance of working, regardless of how things played out in other countries. First, seizure would have resulted in endless litigation. Second, there were practical problems. For example, when I looked into the consequences of the government nationalizing Citi, I discovered (from independent third parties) that Citi most likely would have had to surrender lucrative franchises in several foreign countries that don't allow banks there to be owned by foreign governments.
The other widespread criticism was of my last point: that although the government lowered some mortgage loan standards, the debacle is primarily the private sector's fault. I was attacking the oh-so-convenient myth that private markets are blameless and pure, that the whole problem comes from misguided government efforts to help "those people" get homes they couldn't afford. Many commenters were, shall we say, displeased.
Well, let's see. Most of the bad mortgages were made to supposedly qualified borrowers, without pressure from the government. Lenders required little in the way of down payments or credit checks; they wanted to juice up their loan volume. Credit-rating agencies gave AAA ratings to trash, to keep fee income flowing. Yield-hungry investors snapped up garbage that bore the agencies' imprimatur. Private enterprise all the way.
Credit default swaps and other esoterica spread the problems worldwide, magnified losses, and put even the soundest institutions at risk. That's because if giant, less sound institutions had failed en masse, they would have defaulted on their obligations to their sounder trading partners.
We also need to remember that for all the criticism (including mine) of particular tactics, Hank Paulson and Tim Geithner and Ben Bernanke bailed out the U.S. financial system at no net expense to America's taxpayers. An impressive achievement.
Instead of a discussion about what happened, we've gotten into a government-vs.-free-market shoutfest. These fragmented days, many people tend to see things in black and white terms, in ways that reinforce what they want to believe. The real world is more complicated than that. Black and white have their places -- but to understand the financial meltdown, you need to see some gray.
This story is from the July 12, 2012 issue of Fortune.
-
Ben Bernanke is just doing his job, folks
Love them or hate them, the Fed crew are the rare breed in Washington that aren't just looking out for Number One.
FORTUNE -- We have an unfortunate tendency in this country to treat people as either heroes or villains, with no gradations in between. Take Fed chairman Ben Bernanke. He's being called exceptionally vicious names by right-wing types for supposedly undermining our currency and planting the seeds for future inflation -- MORE
Allan Sloan, senior editor-at-large - Mar 21, 2012 5:00 AM ETPosted in: aig, Allan Sloan, Ben Bernanke, Federal Reserve, interest rates, Macro, mortgage crisis, stress tests -
Uncle Sam's new crusade against banks
The Feds are suing 18 banks over the billions Fannie and Freddie lost on toxic mortgages. How solid is their case?
By Roger Parloff, senior editor
FORTUNE -- As if the banks didn't have enough problems. Uncle Sam is now suing 18 of the country's largest banks for selling $200 billion in toxic mortgage-backed securities to Fannie Mae and Freddie Mac. Columbia Law School professor Jack Coffee termed the action "the most aggressive MORE
Nov 8, 2011 5:00 AM ETPosted in: Banking, Fannie Mae, Federal Housing Finance Agency, fhfa, Freddie Mac, lawsuits, mortgage crisis -
How Citi is coping in a trying time
CEO Vikram Pandit discusses potential in emerging markets, the dark days of 2009 -- and his willingness to talk with Occupy Wall Street.
FORTUNE -- Next year, Citigroup will reach a historic milestone: its 200th birthday. That makes it one of the oldest banks in the country and, fittingly for an enterprise established two days before Congress declared war against the British in 1812, one that has survived many a crisis. In MORE
Oct 24, 2011 5:00 AM ET -
To fix the economy, first fix the housing market
There's no way the U.S. can get back on track without a cure for what's killing real estate.
By John Cassidy, contributor
FORTUNE -- Is this a great country or what? At the start of last year, a friend of mine, the proprietor of a small business that has suffered badly in the recession, entered a trial mortgage-modification program. A few months later the bank told him that his application for a government-assisted MORE
Oct 3, 2011 5:00 AM ET -
DC's new motto: Why buy when you can rent?
Selling the massive glut of homes the U.S. government now owns hasn't exactly worked out. Now Washington is exploring the idea of renting them.
FORTUNE -- Owning once trumped renting, but the collapse of the U.S. housing market changed all that. Newly strapped consumers took it upon themselves to redefine the American dream, making it socially acceptable to mail in a rent check instead of a mortgage payment. Now, it seems MORE
Nin-Hai Tseng, Writer - Aug 24, 2011 4:39 PM ET -
Can Brian Moynihan fix America's biggest bank?
With its damaged reputation and huge mortgage losses, Bank of America is still reeling from the financial crisis. But CEO Brian Moynihan may be the right guy to turn things around.
FORTUNE -- It's hard to think of a company that emerged from the financial crisis more despised than Bank of America. Sure, Goldman Sachs gets pilloried as a symbol of Wall Street greed and excess. But when you count up MORE
Shawn Tully, senior editor-at-large - Jul 7, 2011 5:00 AM ET -
The war over consumer financial protection intensifies
A series of bills aimed at watering down the Consumer Financial Protection Bureau will be up for vote this week. What's a consumer agency that can't protect?
by Abigail Field, contributor
FORTUNE -- An obscure but extremely important political war is being fought in Washington right now over the design and power of the Consumer Financial Protection Bureau, the new agency created in the wake of the financial meltdown to protect consumers MORE
May 3, 2011 12:21 PM ET -
The return of real estate
Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing.
From his wide-rimmed cowboy hat to his roper boots, Mike Castleman fits moviedom's image of the lanky Texas rancher. On a recent March evening, Castleman is feeding cattle biscuits to his two pet longhorn steers, Big Buddy and Little Buddy, on his 460-acre Bar Ten Creek Ranch in Dripping MORE
Shawn Tully, senior editor-at-large - Mar 28, 2011 5:00 AM ET -
Obama has a mortgage plan (or three) worth reading
The president has three plans on the table. Which one is going to fix the mess we're in?
The Obama administration had scarcely released its plan to fix Fannie Mae and Freddie Mac before howls of protests arose from members of Congress, consumer advocates, and community bankers, all screaming that this is an about-face from a long-standing policy to promote home ownership in America. But enough already.
With its white paper, which MORE
Mar 14, 2011 5:00 AM ETPosted in: Becky Quick, Economy, Fannie Mae, foreclosures, Freddie Mac, housing, mortgage crisis, mortgages, real estate
