Housing Crisis Six Years Later: Still Sorting Through the Wreckage

It’s been six years since the housing market imploded. We all knew the economic reverberations would be severe. We knew the implications were dire, and that some government action would probably be needed to cushion the blow.
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However, as a nation, we were deeply conflicted about the right course of action. That same sense of uncertainty remains today, as we continue to sort through the wreckage that Wall Street left behind. Questions remain about whether policymakers acted appropriately in bailing out AIG, allowing Lehman Brothers to slide into bankruptcy and in the several settlement offers that have followed revelations of extensive mortgage fraud by these and other financial giants.

There is a also pervasive belief by some that policymakers and regulators acted arbitrarily and randomly.

Our Miami foreclosure defense lawyers know this isn’t entirely surprising. After all, it’s been 80 years since the Great Depression, and economic scholars continue to debate the catalysts and effectiveness of government response. Maybe it will be the same with The Great Recession.

One aspect of the crisis response that continues to be criticized – for varying reasons – is the extent to which the federal government aided insurance company A.I.G. Recently, shareholders filed a lawsuit arguing the Federal Reserve’s bailout of the firm amounted to an illegal taking of private property. Three of those who orchestrated the bailout strategy are slated to testify soon.

AIG was in trouble because it unwisely insured mortgage-backed securities. In fact, it owed billions to major global banks. Although much of the public opinion on the bailout questioned why the government thought it best to funnel taxpayer money to help an insurance company, the firm’s shareholders are suing on the assertion that terms of the bailout weren’t generous enough.

Regulators have voiced great consternation with the way AIG conducted business, which undoubtedly contributed to the housing crisis. And it’s no secret that the government was interested in making sure the banks owed money by AIG would receive it. (Just one example: Deutsche Bank was owed $12 billion. Others were owed just as much, if not more.)

Still, there remains controversy over whether banks should have accepted less than what they were owed on those loans, given the situation and the fact that innocent taxpayers were footing the bill.

Another aspect of government response that has received much criticism is the response – or lack of it – to the Lehman Brothers fallout. Former U.S. Treasury Secretary Timothy Geithner, as well as others involved in the decision-making process, insist they had no legal tools to save Lehman Brothers from its bankruptcy because the firm was insolvent, having fewer assets than financial obligations. Although some subsequent analysis has tended to back this assertion, a new report from the New York Fed indicates the company was only “narrowly insolvent,” which means it would have been a prime candidate for bailout.

However, the climate at the time is what some now describe as “bailout fatigue.” In September 2008, the Bush Administration had already taken over Fannie Mae and Freddie Mac, Bear Stearns had received a bailout. When word of Lehman’s failure broke, there was a general consensus that the line had to be drawn somewhere, and this would be it.

The question now is what would have happened had the government chose to save Lehman? There is a lot of evidence to suggest it might not have mattered, despite the dramatic drop in stock the failure caused. That’s because in short order, other companies also began to fail, including AIG (just days later), Morgan Stanley, Wachovia and Citigroup.

Regulators – current and former – insist decisions they made with regard to who got a bailout and who did not were methodical and firmly rooted in the individual circumstances of each company. They looked at whether it was a bank, whether it was solvent and whether it was systemically important.

Others argue the decisions were more arbitrary.

Although the “what-ifs” may never be answered to full satisfaction, ongoing discussion about government response is important to helping us determine what course of action would be best taken next time (which hopefully won’t be for at least another 80 years).

If you’re battling foreclosure in Miami or the surrounding areas contact Bruce Jacobs & Associates for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Debt Warriors with Bruce Jacobs,” discussing foreclosure topics that matter to YOU.

Additional Resources:
Six Years Later, We’re Still Litigating the Bailouts. Here’s What We Know. Oct. 3, 2014, By Neil Irwin, The New York Times
More Blog Entries:
“Relief” Of National Mortgage Settlement a Farce, Oct. 2, 2014, Miami Foreclosure Lawyer Blog