Reliving the financial meltdown, ten years later

CNN's Chief Business Correspondent Christine Romans looks back on what it was like covering the financial crisis that ushered in the worst recession since the Great Depression.

Posted: Sep 13, 2018 8:52 AM
Updated: Sep 13, 2018 9:13 AM

When John Taylor starts remembering the years leading up to the financial crisis, his fury wells up all over again.

As president of the nonprofit National Community Reinvestment Coalition, he warned Congress about the predatory and fraudulent lending that was fueling a housing bubble as early as 2000. Lawmakers told the Federal Reserve to write rules that would have put a stop to the worst practices. But the crash came first.

"Thinking about it now, I can feel myself being angry about it," says Taylor, in a soft accent left over from his upbringing in the housing projects of Boston. "Because we fought when we saw these things happening. We brought it to the attention of both Democrats and Republicans. In the end, it took the nation's economy having to collapse before they felt the need to do something."

The mounting crisis turned into a full-blown crash nearly 10 years ago, when Lehman Brothers filed for the largest bankruptcy in United States history on September 15, 2008. Stuffed to the gills with bad mortgages, it sustained heavy losses as housing prices dropped, and imploded after multiple acquisition deals fell through.

The collapse set off a chain reaction of bank failures that required unprecedented federal action to unwind.

Now, with a buoyant economy finally starting to lift some of the United States' most depressed pockets, CNNMoney is taking a look back at the decade following the financial meltdown — and the signs that something similar might again be on the horizon, as Congress and regulators begin to loosen some of the rules they put in place to fix and prevent the problems.

"We're sitting here, 10 years later, with a short-term memory that doesn't seem to recall how we got into that mess," Taylor says. "We got into that mess because of the lack of regulation, and now we're talking about making banks less accountable. It makes no sense whatsoever."

The scars that remain

Of course, America has come a long way since the Federal Reserve and the Treasury had to step in to save the banking system from going under. Corporate profits are at record highs, the unemployment rate is at an 18-year low and the Dow Jones Industrial Average has nearly quadrupled since its Recession-era nadir in 2009.

But this is still a changed country. By many metrics, and for millions of Americans, the recovery has yet to arrive. Take the homeownership rate, for example: Only in 2017 did it stop its long downward slide, after private equity investors bought hundreds of thousands of foreclosed homes and rented them back to their former owners, many of whom saw their credit so badly damaged that they can never buy again. Male workforce participation is still nearly as low as it's ever been, since blue-collar professions were particularly hard hit and haven't totally bounced back.

The recovery has deepened the divide in other ways: Geographically, with big tech hubs and cities rich with natural resources booming and the Rust Belt falling behind. By education level, with people with bachelors degrees rejoining the workforce faster than those who dropped out of college or only graduated high school. And by income, with most gains going to households in the top 10% of the wage scale.

Median household net worth remains below where it stood in 1998, according to the Federal Reserve, even as households take on more debt than ever before. There's also a shortage of affordable housing, a legacy of the drought in both mortgage and construction lending that lasted long after the worst days of the recession had passed.

Memories of those difficult days seem to have faded from the public consciousness, as have the lessons we learned on how we got there in the first place.

Related: My road back from the Great Recession

Congress tried to answer this question when it established the Financial Crisis Inquiry Commission, and its 2011 autopsy of the meltdown remains excellent reading today. Its fundamental conclusion: The financial crisis was not like a freak weather event, as some bankers and regulators had claimed. Rather, it was man-made, predictable and entirely avoidable.

If only lawmakers hadn't knocked out the legal guardrails in the 1990s that had kept banks small and relatively uncomplicated. If only bank CEOs had thought more critically about the complex securities they had created and traded with abandon. If only the Federal Reserve had acted to stop the flow of toxic mortgages that would rot through the core of the nation's largest financial institutions — they could have saved the global economy from disaster, the commission found.

A missed opportunity to change the system

Even as the commission's report was being drafted, however, the next chapter of the recession was unfolding.

In 2009, President Obama pushed through a stimulus package worth $787 billion in an effort to save jobs, and launched home mortgage modification programs to help those at risk of foreclosure.

A year later, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established new oversight bodies to coordinate the alphabet soup of regulators that had avoided responsibility by acting in silos. It also created the Consumer Financial Protection Bureau, which was explicitly charged with monitoring malfeasance by lenders. It instructed financial regulators to draft new rules for derivatives, credit bureaus, mortgage appraisals, executive compensation, corporate governance and other factors that played a role in the economy's implosion.

Related: The stunning downfall of Bear Stearns and its bridge-playing CEO

While most agree that the financial system is safer now than it was before the crisis, there's been abundant criticism of the adequacy of the response.

Many argue that bailouts for homeowners should have been much more generous, in order to avoid more foreclosures and to better stabilize neighborhoods, and that banks should have been pushed harder to lend to qualified borrowers once new safeguards were put in place.

Others faulted Obama for not punishing the executives at fault for reckless lending. Although their firms — and thus shareholders — have paid out hundreds of billions of dollars in fines, none of the people running these investment banks and mortgage lenders went to jail. The Financial Crisis Inquiry Commission itself made eleven criminal referrals to the Department of Justice, and none were prosecuted. The commission's chairman Phil Angelides says the lack of action sent a message to Wall Street that consequences for individuals would be minimal.

"I believe it was a seminal failure of the Obama administration not to hold accountable the people responsible for the wrongdoing," Angelides says. "If someone robbed a 7-Eleven of $1,000, and were able to settle up by having someone else pay $50, would they do it again? Of course they would."

Related: Too-big-to-fail banks keep getting bigger

Banks have spent billions of dollars complying with Dodd-Frank, even while fighting the rules as they were written, contributing to long delays in implementation. As of mid-2016, 20% of the mandated rules hadn't been proposed at all.

The Treasury's independent Office of Financial Research, which Dodd-Frank established to serve as an early warning system for impending crises, has been dramatically scaled back.

More broadly, Anat Admati, a professor at Stanford's Graduate School of Business, argues that reformers missed their chance to increase transparency in the financial system and decrease the industry's dependence on debt, which could pose a risk as interest rates start to rise.

"We haven't had a major crisis and a bailout," says Admati. "But in terms of being prone to one, I'm disappointed that relatively little or not enough really changed."

Deregulation begins again

Earlier this spring, after years of attempts, Republicans passed the most significant rollback of Dodd-Frank regulations since the bill was enacted, with the help of 16 DemocratIc senators who voted to exempt banks with less than $250 billion in assets from enhanced supervision. The bill also frees most banks from having to report lending data used to police for discrimination and weakens mortgage underwriting standards, among a host of other provisions.

Meanwhile, President Trump's picks to head federal agencies overseeing the banks have either worked for the industry, like Securities and Exchange Commission chairman Jay Clayton, or have been harsh critics of the agency they've been put in charge of, like the Consumer Financial Protection Bureau's acting director Mick Mulvaney. They have slowed or halted enforcement actions and rule making and imposed hiring freezes, limiting their ability to pursue fraud.

On the international level, the United States has withdrawn from some of its most important alliances, weakening relationships with countries like Canada, the UK and Germany that would become essential if a new crisis were to arise.

"The political economy landscape has shifted, with a fading commitment to international cooperation — ironically, the very kind of cooperation that prevented the crisis from becoming another Great Depression," said Christine Lagarde, managing director of the International Monetary Fund, in a speech last week.

Related: 10 years after Lehman, Mark Carney says another crisis could happen

Add to all of this an exuberant market and it again brings big risks, from rising corporate debt to cyber threats that can cripple whole companies in an instant. In combination with weaker tools to address financial failures when they occur, Columbia Law professor Kathryn Judge worries that these industry-friendly regulators again won't take action when they need to.

"There's been a shift from safety to growth," Judge says. "But if you want to have a growth-oriented system, then you have to accept that there's going to be fragility. How are we going to deal with that fragility when it becomes manifest?"

A Decade Later: It's been 10 years since the financial crisis rocked America's economy. In a special series, CNNMoney examines the causes of the crisis, how the country is still feeling its effects, and the lessons we have — and have not — learned.

Editor's note: This is an updated version of a story that first ran in March, 2018.

Minnesota Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 40163

Reported Deaths: 1528
CountyConfirmedDeaths
Hennepin12867789
Ramsey5066230
Dakota252494
Stearns244819
Anoka2328111
Nobles16766
Olmsted119617
Washington119040
Mower9722
Rice8628
Scott8034
Clay59838
Kandiyohi5841
Blue Earth5352
Wright5055
Carver4331
Todd4022
Sherburne3405
Lyon3312
Freeborn3020
Watonwan2420
Steele2401
Benton2283
St. Louis20316
Nicollet18712
Martin1715
Cottonwood1380
Goodhue1378
Winona13315
Le Sueur1171
Pine1110
Crow Wing10812
Chisago1031
Otter Tail1021
McLeod960
Dodge930
Carlton890
Polk863
Unassigned8438
Chippewa791
Isanti780
Waseca730
Itasca6812
Douglas670
Murray670
Pipestone664
Meeker621
Morrison611
Faribault600
Becker570
Jackson570
Sibley562
Pennington530
Beltrami410
Brown392
Renville372
Mille Lacs342
Wabasha340
Rock310
Yellow Medicine310
Fillmore300
Houston290
Swift251
Grant220
Norman210
Redwood210
Wilkin213
Cass192
Roseau190
Big Stone170
Koochiching171
Kanabec161
Wadena160
Aitkin150
Marshall120
Pope120
Lincoln110
Clearwater100
Mahnomen101
Hubbard80
Stevens80
Lake60
Traverse60
Lac qui Parle40
Red Lake40
Kittson20
Cook10
Lake of the Woods00

Iowa Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 33162

Reported Deaths: 740
CountyConfirmedDeaths
Polk6990182
Woodbury328243
Black Hawk239759
Buena Vista172711
Johnson13848
Linn134183
Dallas133031
Marshall106819
Scott92610
Dubuque83422
Story8254
Pottawattamie78012
Wapello71231
Muscatine68344
Crawford6793
Sioux4930
Tama47829
Wright3891
Louisa36313
Plymouth3365
Jasper33217
Warren3001
Dickinson2853
Webster2844
Washington2489
Cerro Gordo2231
Hamilton1931
Boone1601
Clay1431
Clarke1403
Allamakee1354
Clinton1211
Mahaska11817
Shelby1180
Poweshiek1088
Carroll1041
Pocahontas1041
Bremer1027
Franklin990
Des Moines952
Emmet920
Henry903
Hardin880
Cedar851
Cherokee811
Taylor810
Monona770
Marion750
Floyd742
Benton721
Guthrie724
Jones680
Sac650
Osceola640
Iowa621
Jefferson620
Buchanan611
Butler602
Humboldt591
Calhoun582
Hancock571
Harrison560
Delaware541
Fayette540
Lee542
Madison512
Monroe517
Jackson480
Lyon480
Clayton473
Mills460
Palo Alto460
Mitchell430
Winneshiek430
Davis421
Grundy420
Kossuth390
Howard370
Union370
Lucas324
Winnebago310
Chickasaw290
Greene290
Cass270
Ida230
Unassigned220
Appanoose213
Van Buren210
Worth210
Keokuk201
Page200
Adair160
Audubon161
Ringgold151
Decatur120
Montgomery112
Wayne100
Adams80
Fremont80
Rochester
Scattered Clouds
66° wxIcon
Hi: 79° Lo: 60°
Feels Like: 66°
Mason City
Few Clouds
70° wxIcon
Hi: 82° Lo: 62°
Feels Like: 70°
Albert Lea
Broken Clouds
70° wxIcon
Hi: 78° Lo: 61°
Feels Like: 70°
Austin
Broken Clouds
70° wxIcon
Hi: 78° Lo: 61°
Feels Like: 70°
Charles City
Scattered Clouds
68° wxIcon
Hi: 81° Lo: 62°
Feels Like: 68°
Cooler air finally filtering in, rain chance returns Saturday
KIMT Radar
KIMT Eye in the sky

Latest Video

Image

Connecting with a loved one with dementia during the pandemic

Image

Bruins set to host all-star game

Image

COVID-19 Cases Expected to Spike in North Iowa

Image

Training hard for a season that might not happen

Image

Sean's 6pm Weather 7/10

Image

Sweet Corn season kickoff

Image

Getting caught in the act

Image

Forum tomorrow: educating young voters

Image

Donation to Channel One Food Bank

Image

Concern over spread of COVID-19 downtown

Community Events