Scandal: Market Crisis

Updated April 7, 2009

Check out ProPublica's comprehensive Bailout Guide. We track every taxpayer dollar, every recipient and every program, all in plain English.

The current financial crisis, widely acknowledged to be the worst since the Great Depression, has its roots firmly planted in the subprime mortgage crisis, which in turn was caused by unscrupulous lending by the mortgage industry, deceptive credit ratings and years of  deregulation and loose mortgage standards.

The mortgage crisis spiraled into global proportions after the mortgage industry bundled its home loans into complex -- and often unregulated -- financial vehicles, which it sold to major banks across the country. When housing prices began to fall in 2006 and mortgage rates kept rising, the default rate on home loans skyrocketed. And the financial industry was left scrambling to cover those debts.

Many banks were surprised to learn the extent to which they had exposed themselves to risk since credit rating agencies had given these bundled loans their highest ratings, and the banks had purchased credit default swaps, a type of unregulated insurance, to cover their bets. But the ratings turned out to be faulty, which some employees knew at the time, and the credit default swaps ended up actually fueling the crisis.

In March, the crisis claimed the investment bank Bear Stearns, and the Federal Reserve provided financial backing to secure a merger with JPMorgan Chase. Countrywide -- the nation's largest mortgage lender -- was also felled after mounting losses from subprime investments forced a sale to Bank of America.

In September, major banks and financial institutions began to falter in rapid succession, and the government scrambled to respond with the greatest market involvement since the 1930s. Mounting financial troubles at the government-sponsored mortgage giants Fannie Mae and Freddie Mac, which own or guarantee nearly half of all U.S. mortgages, forced the Treasury to seize them on September 7.

Just a week later, Lehman Brothers, its books laden with subprime mortgages, filed for bankruptcy (the biggest in U.S. history), and Bank of America bought a floundering Merrill Lynch. On September 16, the Federal Reserve agreed to bail out the insurance behemoth AIG for $85 billion. AIG's bailout has since ballooned to around $180 billion. (We have a separate scandal page devoted to AIG's collapse and rescue.) The U.S. has also stepped in to rescue Citigroup, 36 percent of which is now owned by the government.

In early October, Congress authorized a $700 billion plan, dubbed TARP, to contain the crisis and thwart further bank failures. The Treasury Department soon began lending the first half of that money to banks across the country. (We're keeping a running tally of the banks getting bailout bucks.)

TARP has attracted a broad range of criticism since its inception. Its goal was to get banks to lend, but it doesn't require them to do so. Lending has actually gone down as banks use the money to acquire weaker banks and pad the pockets of their shareholders instead. Some banks have also been paying generous bonuses to their employees.

Government watchdogs warn that TARP oversight and transparency are falling short, partly because the Treasury has at times failed to supply enough detail. They also say it is vulnerable to fraud and are investigating whether political interference determined which banks got aid.

On Feb. 10, Treasury Secretary Timothy Geithner unveiled his plan for the second half of the TARP funds, which was promptly criticized for its lack of detail and resemblance to the previous administration's strategy. The hallmark of the plan, which the government explained more fully on March 23, is a public-private partnership designed to rid banks of their toxic assets. But big bailed-out banks have hinted at plans to boost prices by bidding on one another's assets with taxpayer money.

The administration and Congress have also attached stricter restrictions to bailout funds, like the executive pay cap passed in the economic stimulus bill, prompting a handful of banks to return the government's investment.

As of March 31, the government had spent nearly $2.98 trillion on its financial rescue efforts.

Essential Reading (and Listening):

  • "This American Life" explains the subprime mortgage crisis in a broadcast called "The Giant Pool of Money."
  • The New York Times' Roger Lowenstein explains how the three biggest credit rating agencies gave many securities backed by subprime mortgages their highest rating when in fact they were poised for disaster. Bloomberg also has a great two-part series on this.
  • Portfolio broke the story about Countrywide's ‘Friends of Angelo' program, which gave preferential mortgages to Sens. Christopher Dodd and Kent Conrad, among other VIPs.
  • The Washington Post explains how years of weak regulation and lax oversight helped bring about the crisis at Fannie Mae and Freddie Mac.
  • The New York Times' financial columnist answers FAQs on the Wall Street crisis and the government's response.
  • Two economists put the crisis on Wall Street in layman's terms.
  • A USA Today article explains how the Wall Street crisis will affect taxpayers, mortgage borrowers, retirement investors and others.
  • Still confused? BBC News has a very helpful, simplified glossary of financial terms.
  • This Rolling Stone article will take you on a very entertaining romp through the financial crisis and the government's rescue efforts. (It also has an easy-to-follow explanation of AIG's collapse.)
  • The latest coverage is below, but you'll find all the stories ProPublica has gathered on the financial crisis here.

Essential Documents:

Latest Stories

Home Builders (You Heard That Right) Get a Gift New York Times, 11/16

How Goldman Secretly Bet on the U.S. Housing Crash McClatchy, 11/2

Fed Held Back as Evidence Mounted on Subprime Loan Abuses Washington Post, 9/28

Gov’t Mortgage Partners Sued for Abuses AP, 8/6

PIMCO’s New Bailout Hat Raises Conflict Concerns POGO, 8/6

BofA Execs Stayed Mum on Swelling Merrill Losses Wall Street Journal ($), 8/6

Old Banks, New Lending Tricks BusinessWeek, 8/6

Mortgage-Servicer Performance Is ‘Uneven’ Wall Street Journal ($), 8/4

Credit Unions: Where the Credit Flowed Too Freely Star Tribune, 7/30

Senate Probes Banks for Meltdown Fraud Wall Street Journal, 7/30

Countrywide Mortgage Not Living Up to Deal, Critics Say Miami Herald, 7/29

U.S. Effort to Modify Mortgages Falters Wall Street Journal ($), 7/28

Foreclosures Are Often In Lenders’ Best Interest Washington Post, 7/28

Bank ‘Walkaways’ From Foreclosed Homes a Growing Trend Cleveland Plain Dealer, 7/22

Authorities Ignored Real Estate Flip Fraud Sarasota Herald-Tribune, 7/22

Credit Rating Agencies Escape Overhaul Financial Times , 7/22

Regulators Said to Ignore Misconduct at Kansas Bank Implode-o-Meter, 7/17

Mortgage Firms Struggle to Redo Hard-Hit Loans Wall Street Journal ($), 7/16

Subprime Loans Were Big Biz for Struggling Lender CIT Center for Public Integrity, 7/15

Some Bailout Transparency Promises Remain Unkept ProPublica, 7/14

AIG Seeks Clearance For More Bonuses Washington Post, 7/10

Citigroup Shakes Up Leaders to Pacify U.S. Wall Street Journal ($), 7/10

Mortgage Fraud Reports Rise, But Some Fraud May Go Undetected Center for Public Integrity, 7/10

Treasury Works on ‘Plan C’ to Fend Off Lingering Threats Washington Post, 7/8

U.S. Regulators Prepare to Defang New Consumer Agency Reuters, 7/8

Study: Many Mortgage Defaults Are Intentional Time, 7/8

Industry Takes Aim at Plan to Create Financial Protection Agency Washington Post, 7/7

Employees at Troubled AIG Unit Describe Tyrannical Head Vanity Fair, 7/7

Fed Study: Mortgage Lenders Avoid Reworking Loans Boston Globe, 7/7

Financial Regulation: Industry Objections Increasing BusinessWeek, 6/30

GAO: Reverse Mortgages Leave Seniors at Risk Washington Post, 6/30

E-Mails: U.S. Considered Letting AIG File for Bankruptcy Fox Business, 6/30

Banks Jack Up Fees Washington Post, 6/30

Bernanke to Testify as New BofA Details Emerge Wall Street Journal ($), 6/25

Citi Unit Halts Mortgage Applications on Missing Data Bloomberg, 6/25

Foreclosure Backlog Imperils Recovery Washington Post, 6/24

Citigroup Has a Plan to Fatten Salaries New York Times, 6/24

Bailout Underwrites Calif. Bank’s Risky Practices Sacramento Bee, 6/23

Three Banks Suspend Their TARP Dividends Wall Street Journal ($), 6/23

Editorial: Treasury’s Reform Plan Gives Credit Raters a Pass Wall Street Journal ($), 6/22

Dispute Grows Over TARP Chief’s Powers Los Angeles Times, 6/18

Only a Hint of Roosevelt in Financial Overhaul New York Times, 6/18

Born in a Previous Crisis, OTS Faces Extinction Washington Post, 6/18

Obama Drops Salary Caps at Bailed Out Firms Wall Street Journal ($), 6/10

U.S. to Propose Wider Oversight of Compensation New York Times, 6/8

U.S. Will Let Some Banks Repay Aid Washington Post, 6/8

Doubts Mount over Toxic Asset Plan Financial Times, 6/8

Countrywide Exec Often Warned of Mortgage Risks Reuters, 6/8

FHA Cracks Down on Mortgage Brokers New York Times, 6/8

White House Set to Appoint a Pay Czar Wall Street Journal ($), 6/5

Ailing, Banks Still Field Strong Lobby at Capitol New York Times, 6/5

Ex-Employees Claim Racism in Wells Fargo Subprime Loan Push Baltimore Sun, 6/5

Bank Profits From Rule Tweak Mask Looming Loan Losses Bloomberg, 6/5

SEC Accuses Countrywide’s Ex-Chief of Fraud New York Times, 6/5

Financial Firms Won Friendlier Accounting Rule Wall Street Journal ($), 6/3

Cox Questioned Fannie, Freddie Oversight in Last Days at SEC Bloomberg, 6/2

Can a Gov’t of Politicians Keep Politics Out of GM? McClatchy, 6/2

Banks May Soon Get Nod for a Quick Bailout Exit New York Times, 6/2

In Cox Years at SEC, Policies Undercut Action Washington Post, 6/1

Potential Conflicts Abound in GM Takeover Wall Street Journal ($), 6/1

Gov’t Taps Bailout Contractors With Conflicts Washington Independent, 6/1

Even in Crisis, Banks Dig In to Fight Regulation New York Times, 6/1

Proposal for U.S. Bank Regulation Draws Flak Financial Times, 5/29

New Rules May Not End Banks’ Appraisal Conflicts Mortgage Lender, 5/29

Wall Street’s Proposals Adopted in Treasury Overhaul Bloomberg, 5/26

Zombie Banks Walk Among Us CNN Money, 5/26

Directors Are Faulted at Home Loan Banks Wall Street Journal ($), 5/26

Mortgage Modifying Fails to Halt Defaults Wall Street Journal ($), 5/26

Board That Punishes Problem Mortgage Lenders Called Ineffective Washington Post, 5/22

Banks Exiting TARP May Reap ‘Ruthless Bargain’ Bloomberg, 5/22

U.S. Rescue Aid Entrenches Itself Wall Street Journal ($), 5/21

Geithner Says Treasury May Move ‘Quickly’ to Sell TARP Warrants Bloomberg, 5/21

Criminal Probe Looks at Lehman Wall Street Journal ($), 5/21

U.S. May Add New Financial Watchdog Washington Post, 5/20

U.S. Weighs How to Let Banks Pay Back Bailouts New York Times, 5/20

Momentum Grows For Executive Pay Rules Washington Post, 5/20

Geithner’s Gift to Wall Street CNN, 5/19

Banks’ Efforts to Repay Bailouts May Undercut Taxpayers New York Times, 5/19

BlackRock, a U.S. Adviser, Wears Multiple Hats Wall Street Journal ($), 5/19

Insurers Back Away From TARP Wall Street Journal ($), 5/18

At Geithner’s Treasury, Key Decisions On Hold Washington Post, 5/18

Smaller Banks Need Additional $24 Billion Financial Times, 5/18

SEC Poised to Charge Ex-Countrywide CEO With Fraud Wall Street Journal ($), 5/14

Banks Are Swamped by Refinancing Fever Financial Times, 5/14

Shareholders Hurt in Bailout Payback Breakingviews.com, 5/13

U.S. Foreclosure Program May be Insufficient Financial Times, 5/13

Big Banks Could Lose More Than Stress Tests Projected McClatchy, 5/13

U.S. Eyes Bank Pay Overhaul Wall Street Journal ($), 5/13

Officials Knew of AIG Bonuses Months Before Firestorm Washington Post, 5/13

Should the Government Subsidize Mortgage Modifications? New York Times, 5/12

More Banks Tackle TARP, Capital Gaps Wall Street Journal ($), 5/12

Credit Insurance Hampers GM Restructuring Financial Times, 5/12

Treasury Nominee to Keep Corporate Pay Washington Times, 5/12

Recovery Still Depends On Bold Actions, Officials Say Washington Post, 5/11

Goldman to Pay $60 Million in Subprime Settlement Bloomberg, 5/11

Ex-Ameriquest Employees Describe Subprime Lending Fraud American News Project, 5/11

2 Banks Cited in Stress Tests Find Ready Investors New York Times, 5/11

Banks Won Concessions on Stress Tests Wall Street Journal ($), 5/11

Banks Say Gov’t Softened Capital Requirements Financial Times, 5/11

FHA Seeks $800 Million from Cover Losses Washington Post, 5/8

Are we missing something? .(JavaScript must be enabled to view this email address).