Capitol Report – The Economy: 5 years removed from the brink
By State Representative, Leon D. Young
Last Sunday, September 15, marked the fifth year anniversary of the collapse of Lehman Brothers and the beginning of the economic meltdown that threatened global financial markets around the world. America was “ground zero” for this economic downturn.
According to Hank Paulson, U.S. Treasury Secretary at the time, there were tell-tale signs of an impending economic crisis. He specifically cited the lack of transparency in the over-the-counter derivative market and the size of hedge funds as being exceedingly problematic. Housing was another major quagmire looming on the not too distant horizon.
The complexity of mortgage securities would lead to a pandemic of home foreclosures in this country.
Gone were the days when one would simply go to the local bank to apply for a mortgage.
If you had any problems after receiving the mortgage, you could go to the local branch bank, and if there was a reasonable solution, a mortgage modification may have been extended.
But the protocol had changed to a securitization model.
In 2006, mortgages were sliced and diced, packaged in securities, and then sold in the public market around the world.
Along with innovation came complexity, and complexity is the enemy of transparency. Wall Street hedge fund managers and others reaped huge fortunes, knowing full well that this mortgage game was a house of cards that would someday lead to ultimate financial ruin.
And, as they say in the movies, the rest is history. By 2008, a number of U.S. institutions were teetering on insolvency and some would eventually fail:
• Lehman Brothers, the storied investment bank was allowed to go under that triggered the great economic recession.
• Countrywide, the biggest originator of mortgages went belly up.
• Bears Stearns, a smaller investment bank was saved after the government stepped in.
• Fannie Mae and Freddie Mac, governments ponsored mortgage entities survived the subprime mortgage crisis after being placed into federal conservatorship.
• Merrill Lynch, an investment bank was rescued by a government-sponsored Bank of America purchase.
• AIG, deemed “too big to fail,” was saved only by an emergency infusion of $85 billion from the Federal Reserve.
• Auto bailout, GM and Chrysler received short term loans from the U.S. Treasury in December, 2008 that probably saved those companies.
In the aftermath of the Great Recession, there is still considerable debate as to what caused this economic downturn?
The very fact that we are having this discussion five years after the fact is a testament to how far the economy has come. But, the slow recovery to date is also a reminder that too many people are suffering and can’t find work.