Understanding The Panic Of 2008 In 15 Easy Steps

If you’re wondering how we got into the big money mess, Kiplinger has a nice and easy 15 step guide to the market meltdown. They trace the origins back to 2000, when the Federal Reserve made the federal funds rate, the interest rate banks charge each other for short term loans, very low. Then we go through the speculative bullshit of the subprime mortgage market, the various imaginary castles built on top of it, and then just how everything went to pot once the naked emperor was revealed. No blame-casting, just the straight up facts.

15 Things You Need to Know About the Panic of 2008 [Kiplinger] (Photo: Getty)

Comments

Edit Your Comment

  1. BrianDaBrain says:

    Thanks for the info!

  2. Counterpoint says:

    Great summary of the facts – I was expecting at least some blame to be thrown around in the link, but it was just the facts.

    I do find it odd that Congress hasn’t setup any investigations into what happened, though… I mean, this is more important than steroids in baseball, right?

    • HIV 2 Elway says:

      @Counterpoint:
      I mean, this is more important than steroids in baseball, right?
      +1

    • mac-phisto says:

      @Counterpoint: no, no NO! we don’t have time – NO TIME! – to investigate, we must act OR ELSE! act now while supplies last! don’t delay!

      err…sorry. i was channeling my inner bernake there for a moment.

    • Bladefist says:

      @Counterpoint: There won’t be any real investigations because the group of people who would do the investigations, is the same people who caused a lot of the problems.

      • British Benzene says:

        @Bladefist: They always nail some middleman-type for everything. I think Ollie North is the first time I realized that these middle manager types were just a firewall for the higher ups.

        • Bladefist says:

          @EnglishC6H6 is British Benzene: Yea. Well, believe it or not, there are people who are responsible for this, and they should be named out and dealt with.

          But with it being a huge election year, there is so much spin on everything. The average American has no clue who to blame, myself included. But you can’t just laugh this off and say “welp, its complex, who knows.” You have to find those responsible, and deal with it.

          And I’m quite certain you will find the majority of those people in the senate. And I’m quite certain you’ll find some of them have a R after their name, some with a D. All should fry.

          • papahoth says:

            @Bladefist:

            Bladefist commented on Consumer Confidence Rises 5 Points

            “The worst is behind us.”

            [consumerist.com] 9:54 AM on Aug 27

            • Bladefist says:

              @papahoth: Not sure why you are after me, but I stand behind that comment.

              Oil prices are down. They went up sharply yesterday, but still down when compared to when I made that comment.

              Value of the dollar is climbing. Yes, it is.

              Some markets are still having trouble. Yea? And some still are. Other markets are doing great. This bail out stuff is bad, but in my opinion, we are doing better. We can afford gas and our dollar is becoming more valuable.

              So thanks for proving my predictions right. And have fun with your doom and gloom.

              • papahoth says:

                @Bladefist: I don’t hear anyone else saying the worse is behind us. I hear we don’t know how much worse its going to get. And yes oil prices are down. Less demand due to price and slowing economy. Unemployment is up, hiring is down. Bush no longer says “the tax cuts are working.” Bush is in a panic that he will have no claim to any success. When Bush was inaugurated, the Euro was about .85 to a dollar. Today the Euro is about 1.6 to the dollar. Yea, it has gone down in the last couple of weeks. Whoopee do. Its a shame the country won’t be joining you in your optimism come the first Tuesday in November.

              • papahoth says:

                @Bladefist: One more thing since we want to live with short term memory. The dollar is down sharply today in foreign markets.

                • Bladefist says:

                  @papahoth: Like I said, markets do that. I’m not concerned about Bush. Tax cuts imo are always a good thing. But you have to reduce spending. Which obviously didn’t happen. A lot of the heart aches have come from previous administrations as well.

                  As for your prediction in November, I think you’ll find a big surprise.

              • El_Fez says:

                @Bladefist:

                We can afford gas and our dollar is becoming more valuable.

                Who’s this “we”, paleface? It’s costing me 60 bucks a week just to get to work.

  3. Tiber says:

    Informative, yet concise. Even had some details I hadn’t heard.

    Definite must-read.

  4. snoop-blog says:

    @Counterpoint: Nothing is more important than steroids in baseball! How dare you sir.

  5. VidaBlueBalls says:

    This is exactly the type of material that should be on Consumerist, not the ‘end of the world is nigh!’ and the ‘OMG-it’s-XMAS-in-August-at-Target-LOLz-down-with-capitalism’ posts.

  6. ScottCh says:

    I read a different article yesterday that puts the blame back before 2000, by several years. It describes the successive efforts congress, backed by powerful interests on Wall Street, made to eradicate efforts to regulate the S&L, Energy, and Banking Industries in this country. The same key players have been involved for the last 18 years, perhaps longer.

    That article is posted here in case anyone’s interested.

    • probablykate says:

      @ScottCh: Thank you for sharing! I think THAT article is the best and still easily understandable explanation of how we got into this mess that I’ve seen.

      I think that when something big happens (9/11, this financial crisis) everyone starts paying attention to issues they weren’t really paying so much attention to before, and as a result too much emphasis is placed on recent events. These types of things don’t happen overnight. They usually do have a long and complicated history that only a select few may be aware of.

  7. Tonguetied says:

    I have a very clear memory of reading articles in the late 90’s talking about Congressional and Administrative pressure on the banks and other lenders to not ‘Redline’. These articles clearly stated that by forcing banks to give out bad loans that the entire industry was being set up to take a bath when loanees started defaulting.

    The sad thing is that I don’t have any links to back up my statement. But I remember those articles, I swear I do!

    I can find plenty of links from that time frame hurling accusations of redlining at the banking industries (as anyone with access to Google can also do). I just wish I could find the articles I read predicting this current crisis….

    • papahoth says:

      @Tonguetied: Not illegally discriminating causes you to give bad loans? Yea, keep looking for those links.

    • Bladefist says:

      @Tonguetied: Don’t worry about those links. Anyone who has a memory, remembers the government putting on pressure to give minorities the American Dream.

      In some cases, it means giving loans to people who probably can’t afford them. I doubt it was outlined that way, but the requirements were clear.

      That’s actually the reason Fannie/Freddie were setup. To help banks give people the American Dream.

    • papahoth says:

      @Tonguetied: Here’s a link for you, [www.nytimes.com]

      and I quote to your point “Whenever the mortgage finance giants, Fannie Mae and Freddie Mac, find themselves in a tough spot – and boy, are they in a tough spot now! – they always seem to find a way to blame their problems on “the mission.” “We exist to expand affordable housing,” says Fannie Mae on its Web site, and although it also lists its other mission – providing liquidity for the American housing market – it is the former that has long been the companies’ trump card.”

      ah but “The mission is why their two chief executives, Daniel Mudd at Fannie and Richard Syron at Freddie, could take home a combined $30 million last year, while presiding over one of the great financial disasters of all time, posting billions of dollars in losses with no end in sight.”

      ah but “Fannie Mae and Freddie Mac occupy a complicated place in the nation’s financial system, but the more you understand what they did, the angrier it should make you – especially since it’s likely that you, the taxpayer, will wind up having to pay for their sins. As the two companies continue to post mammoth, multibillion-dollar losses, the Treasury Department is drawing up contingency bailout plans, which will surely include the assumption of hundreds of billions of dollars in potential liabilities.

      That would be hard enough to swallow if the cause had, in fact, been the companies’ willingness to finance low-interest loans to working-class home buyers. But the real reason was greed. You know that statistic you always hear about how half the nation’s $12 trillion in mortgages is “touched” by Fannie or Freddie? The implication, of course, is that the two companies are the very heart and soul of the nation’s housing market. But the majority of the mortgages in question are ones that are held by Fannie and Freddie as part of their gigantic portfolio of mortgage-backed securities – the same kind of complex derivatives that brought down Bear Stearns and have caused untold pain to most of the big Wall Street firms.

      Holding those securities has nothing to do with “the mission.” What Fannie and Freddie are supposed to do – their real mission, if you will – is to create liquidity in the housing market. (The affordable housing mission was added to their charters much later.) They do this primarily by buying mortgages from banks, insuring them, and creating mortgage-backed securities that they then sell to Wall Street. With a long-term mortgage, for instance, Wall Street takes on the interest rate risk, but doesn’t have to worry about the risk that homeowners will stop paying their loans. Fannie and Freddie assume that risk. That arrangement gives the banks more capital to make yet more housing loans, and supposedly frees them to continue loaning even when the economy takes a dip.

      The problem is that while the two companies are still called government-sponsored entities, they are also publicly traded corporations. And for much of the last two decades, they have been hell-bent on growth, the clear goal being to push up their stock prices. “Wrapping” mortgages for banks – you can make money doing that, but you can’t double your earnings every five years, which was the stated goal of the former Fannie Mae chief executive, Franklin Raines.

      Ah, but if you buy up the mortgage-backed securities yourself, taking on the interest rate risk as well as the credit risk – all the while using your government-sponsored pedigree to borrow at lower rates than your Wall Street competitors – well, then you’ve got a spectacular growth business. And if you’re the C.E.O., with lots of stock options and bonuses based on stock price and profits – as Mr. Raines was – you can put tens of millions of dollars in your pocket, too.

      The mission? It was little more than a fig leaf that the companies trotted out whenever somebody pointed out the obvious: that its growing portfolio of mortgage-backed securities was dangerous. (Needless to say, Fannie and Freddie insist that affordable housing is their real raison d’être, and object to such characterizations.)

      Then, in 2003, came the accounting scandal. Fannie Mae had to restate $9 billion in earnings, and Mr. Raines, who had made $90 million during his six years as chief executive, lost his job, replaced by Mr. Mudd, who had been his No. 2. (Mr. Raines never had to give back any of the money, though.) Freddie Mac, its smaller cousin, had to restate about $5 billion in earnings. Its chief was also booted in favor of Mr. Syron, the former executive chairman of the Thermo Electron Corporation. The accounting scandal emboldened their formerly tepid regulator, the Office of Federal Housing Enterprise Oversight, to crack down on the interest rate risk they were taking with their ballooning portfolios.

      So how did Mr. Mudd and Mr. Syron respond? Did they decide to pull back, take less risk and act as a stabilizing force in the market? Not even close. Like their predecessors, Mr. Mudd and Mr. Syron put their investors – and their bonuses – first, and their mission a distant second.

      As we are now learning, in 2005 and 2006, the two men plunged their companies headfirst into subprime mortgages – and continued doing so even as the subprime market began to implode. According to Fannie Mae documents obtained by The Washington Post, Mr. Mudd described getting into subprime mortgages as taking a step “towards optimizing our business.” Mr. Syron did the same – as Mr. Duhigg’s article in The Times made clear. The two companies also got heavily into underwriting so-called Alt-A mortgages, which, as the Post article put it, are “often made with no verification of the borrower’s income.”

      These are the loans that Mr. Syron is now claiming were made to comply with “the mission.” But the mission had nothing to do with it. Fannie and Freddie got involved with subprime mortgages for the same reason as everyone else on Wall Street: they offered higher rates of return than ordinary mortgages. Why? Because they were riskier. As we now all know.

      You want to know the truth about “the mission?” The country doesn’t even need Fannie and Freddie to help with affordable housing. Several laws mandate that banks reinvest in the communities in which they operate – and that mandate has come to be defined largely as making loans available for affordable housing. Several executives involved in community-based banking told me that Fannie and Freddie actually refused to buy those mortgages – they weren’t profitable enough. (A spokeswoman for Freddie Mac denies this.)

      With any luck, once we get through this crisis, the country can figure out a better way to provide both liquidity and stability for the housing market without being so reliant on Fannie and Freddie. But for now, given the paralysis in every other sector of the market, the country badly needs Fannie and Freddie to do what they are chartered to do: “wrap” loans so that banks will keep writing mortgages.

      That’s why Congress recently passed a law that allows Fannie and Freddie to insure mortgages up to nearly $625,500, from the previous limit of $417,000. That’s also why the Treasury is now taking pains to ensure the marketplace that the companies will not go bust, even if it means a government takeover. If Fannie and Freddie were to file for bankruptcy – the fate, frankly, they deserve – the mortgage market (not to mention the entire financial system, just as Mr. Greenspan once predicted) would quite likely freeze up completely. In the midst of the worst housing crisis since the Great Depression, that would be disastrous.

      All right, so be it, we’ll keep them alive for the greater good of the country, moral hazard be damned. But let’s at least acknowledge that there is something deeply flawed with an arrangement in which the shareholders and executives reap the profits in good times, while the government and the taxpayers absorb the losses when things go awry. At the very least, the companies should stop using the mission as an excuse, and acknowledge they did the wrong things for the wrong reason.”

      and finnally, “Their only mission has been to get rich, and it has hurt us all.”

      Greed is not good.

    • Tonguetied says:

      Well I didn’t look very hard…

      I did however find this article by the always insightful Jerry Pournelle that hit the nail on the head about many things…

      [www.chaosmanorreviews.com]

  8. stevejust says:

    Does anyone else find the all the coverage of the entire situation lacking one major, fundamental point that needs to be said? The money never existed. Debt is not money that was lost, it’s a promise to pay that hasn’t happened, and probably won’t happen.

    We are using taxpayer dollars to replace money that never existed in the first place. And if people really understood this, they’d be even more upset than they already are. Because the taxpayer dollars that are going to leave our pockets are real. The value of the houses that were once “worth $600,000″ that are now worth only “$420,000″ never existed. So we’re paying back money that never existed. Those houses were never worth $600,000 even though that’s what people were “paying” for them. And it probably isn’t worth $420,000 either. And that’s why this bailout gets a giant

    FAIL

    • British Benzene says:

      @stevejust: You need to leave your computer NOW. Get off the grid before they get to you…

      /tinfoiled

      • stevejust says:

        @EnglishC6H6 is British Benzene: Hey genius: let’s say you and I contract for something. I say I’ll pay you $100,000. I don’t pay you $100,000. You sue me. It turns out I don’t have $100,000. That’s where the problem ends. You can’t go to the government and get your $100,000. It doesn’t exist.

        That’s what’s happening here — people are mad they’re not getting their money that doesn’t exist, so they’re asking the government for it. The government would never give it to them, except that there’s so much bad debt out there that the whole system has crashed. If you’re too stupid to follow this, that’s your problem.

        But this is reality, and it has nothing to do with tinfoil hats.

  9. Urgleglurk says:

    Tounguetied: Redlining is the refusal to loan in certain areas of a city because of racial or other prejudice. Redlining is not what we have here.

    This was the result of predatory lending to the least likely to be able to pay the loans back. The banks prettied the mortgages up with teaser rates, etc. and then re-packaged them as low-risk securities to sell them off to unwary investors both here and overseas.

    The whole thing fell apart when the original mortgage holders could not make their payments when the teaser rates readjusted upwards – which made those packaged “low-risk” securities about as safe as betting in Las Vegas. Meanwhile, the housing market filled up with these repossessed homes, leading to the point where prices fell because of an excess of demand. The bansk were then stuck with properties that they couldn’t sell for anything like what they were mortgages for – which meant that the banks essentially ran out of money and started to fail.

    Granted, this is the “capsule” version that leaves a lot out…

  10. Craysh says:

    So… they’re completely ignoring the housing act that Carter pushed through that pretty much required these institutions to give sub-prime loans to expand their business? Or that the Clinton Administration added to the problems by adding stricter rules forcing even more housing loans that were sub-prime?
    Yeah, it all happened in the Bush Administration. Bush is always the bad guy. Clinton is God.

    • papahoth says:

      @Craysh: who required who to give subprime loans? That is a bunch of crap. They did it because they thought they could sell them away to people that bundled them in more slices than you can count and falsely assumed that removed most of the risk while maintaining a high yield. You have evidence to the contrary? I can post much to back what I am saying if necessary.

  11. Keavy_Rain says:

    This whole thing sounds like what happened to Providian. If you don’t remember them let me fill you in. They popped on the scene in the late 90’s and would give credit cards to people who had less than perfect credit, “Subprime borrowers” if you will.

    I know this because I had a friend who got a job there and got me into the collections department. $15 an hour plus 20% commission to start back in 1998 was just…unimaginable to someone who made $6.25/hr at Wal-Mart.

    Problem was the commission was damn near impossible to get thanks to the debtors not wanting to answer the phone, screaming “You’ll never get your money”, or just hanging up after I identified myself.

    I left soon thereafter (A tenure so short I leave it off of my resume) and I believe it was in 2000 or 2001 I was watching the news and there was the HR manager I gave my two weeks to, in her car full of boxes, crying to the news reporter about how she came in to work and found out she had no job.

    You’d think something like that might serve as a lesson but apparently no one learns or cares. “Oh, see this is what they did wrong. We’re not doing that so we’ll be OK.”

  12. zyodei says:

    Good article, except where they present a bailout as the only answer.

    The ultimate answer is this: We have been living beyond our means for too long. Our savings rate is Zero. Our government has $50T in unfunded liabilities over the coming decades. Out dollar is almost certainly not going to be the reserve currency over the coming years. We’re going to have to tighten our belts, a LOT. There’s no way around it. Spend less, save more. Try to support your local economy. Don’t buy a big screen TV or a new car, find ways to deliver more happiness from less stuff.

    Throwing money at the problem will only make it worse. There is a major correction due. We cannot avoid it. It is throwing money around, firing up the printing presses in 2000 to avoid a recession after the NASDAQ burst, that caused this mess.

    The ultimate solution is not more regulations. Even if they are efficient and effective (which is very hard to tell with legislation in a chaotic system like financial markets), they will only be a band-aid. The ultimate solution is to completely scrap the whole Federal Reserve system and start from scrath. This mess, along with the NASDAQ pop and others, can be laid right at their feet. Anything else is just buying time.