Whenever anything goes wrong in view of the public, attention quickly moves to rooting out those who should be blamed for whatever it was that went wrong. Given the enormous and far-reaching magnitude of the housing bubble, and the credit crisis and recession it produced, naming and shaming those responsible has turned into something of a cottage industry. (Take a look at the factors that caused this market to flare up and burn out, check out The Fuel That Fed The Subprime Meltdown.)
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While finding those to blame would be impossible and it does not resolve a crisis, it is nevertheless part of the catharsis and the recovery process. With that in mind, let us examine some of those who have drawn scrutiny for their roles in the crisis, as well as a few who may have unfairly escaped their share of blame.
David Lereah, former chief economist of the National Association of Realtors, was an outspoken promoter of the investment virtues of housing throughout the bubble. Penning books with titles like "Why The Real Estate Boom Will Not Bust" (2006) and referring to housing skeptics as "Chicken Littles", Mr. Lereah dismissed the notion of a bubble and may have helped to stoke an already too-hot market.
Many bank CEOs deserve blame for aggressively steering their companies into bad lending practices, but Countrywide's Angelo Mozilo may deserve an extra share. Countrywide was such an aggressive underwriter of subprime loans that it has created a multi-billion dollar headache for Countrywide's acquirer Bank of America (NYSE:BAC) as it resolves bad loan put-backs with Fannie, Freddie and private purchasers.
3. Investment Banks
Investment banks picked up the baton from the commercial banks, buying their ill-considered loans, packaging them into investment securities labeled AAA, and then selling those to pension funds, hedge funds and other institutional investors for a tidy profit. There's plenty of blame to go around here, from joint commercial/investment banks like Citigroup (NYSE:C) to investment banks like Goldman Sachs (NYSE:GS), and they certainly helped funnel enormous sums of money into the housing market (while taking their cut, of course). (Credit rating agencies have a long history in this country. Learn about what they do and how were they developed, check out A Brief History Of Credit Rating Agencies.)
4. Ratings Agencies
For their role as rubber-stampers of AAA ratings on piles of dreck, Standard & Poor's, Moody's and Fitch all deserve healthy doses of blame. If these ratings agencies had done better research, questioned their assumptions more aggressively and avoided the moral hazards of working so closely with the issuers that paid them, the bubble may never have gotten as large as it did.
It would be remiss to completely excuse the "regular people" for their role in the mess. Liar loans required a willing liar to sign the loan, and millions more spent far above their means in the late '90s and early 2000s, leveraging up to do so. A lending bubble can't occur without the co-operation of borrowers, and the American public in general seemed all too willing to believe in the fantasy of the housing bubble and easy credit.
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6. The Overseers
Bill Clinton and Congress
During his presidency, Bill Clinton pushed for stronger enforcement of the Community Reinvestment Act (a decades-old law) and increased bank lending to low-income areas. This did not create the subprime mortgage market, but it seemed to foster lower credit and down payment requirements across the board. At the same time, a deregulatory mood among both parties in Congress led to less regulation and oversight of banks and new financial products like credit default swaps.
Henry Paulson, President Bush's Treasury Secretary from July of 2006 through to January of 2009, seemed to be late in dealing with the crisis and did the market no favors when he failed to prevent the messy and chaotic bankruptcy of Lehman Brothers. That said, Paulson may ultimately get some credit for advancing bailouts that at least quieted the markets during a period of incredible chaos.
Federal Reserve Chairman
Alan Greenspan seems to deserve a larger-than-average share of blame. While Mr. Greenspan has been blamed for his policy of maintaining unusually low interest rates during the bubble period, it was actually his hand-off approach to regulation that may have been more problematic. The Federal Reserve exists at least in part to regulate and oversee banks, and under 1994's Home Ownership and Equity Protection Act, Greenspan could have directed regulators to force banks to curb some of the most egregious practices concerning liar loans and excessive lending, but he chose not to do so. (Confused by the Fed's lingo? Find out what it can tell you and learn how to decipher it, check out Translating "Fed Speak" Into Plain English.)
Though he was left holding the broom as Greenspan exited the stage, there is little to suggest that Ben Bernanke was hawkish about regulation or higher rates prior to that. At this point, his role in the financial crisis is still being written – did moves like the "rescue" of Bear Stearns, TARP, various other bailouts, exceptionally low rates and so on help lessen the severity of the crisis, or have they simply extended or worsened the day of reckoning?
Last and not least, we must consider current Treasury Secretary Timothy Geithner. As a member of the FOMC and President of the New York Fed, it is not clear that Geithner was more inclined to crack down on bank excesses than anybody else in the Fed at the time. Geithner had been a strong advocate for bailouts and restructurings in the beginning that many now feel have been too generous to the banking industry. Though supporters will argue that the U.S. needed functioning banks to avoid the recession turning into a depression, others will argue that socializing the foibles of commercial banks and Wall Street firms failed to hold the wrong-doers to full account.
History Will Be the Final Judge
It will probably be another decade or two before a full accounting and understanding of the housing bubble and its financial fallout is really possible. Although it is clear now that there were many wrong-doers, it has yet to be seen whether those who have claimed to help solve or ease the crisis did in fact make things any better. Suffice it to say, financial journalists and historians will likely be arguing over this one for a long time to come.