“Pass the trash”: The mortgage default crisis as state-corporate crime

• Pages: 17-41
• DOI: https://doi.org/10.1108/S1521-6136(2010)0000015004
• Published date: 21 December 2010
• Date: 21 December 2010
• Author: John Liederbach

‘‘PASS THE TRASH’’: THE

MORTGAGE DEFAULT CRISIS

AS STATE-CORPORATE CRIME

John Liederbach

Whispers about an unfolding financial calamity began to circulate among

stock market analysts and Wall Street bankers during autumn 2008. The

rumors emerged during a tumultuous two weeks in September that produced

a series of events thought to be unimaginable just a few months earlier. The

crisis started with an emergency takeover by the Treasury Department of the

$5 trillion in assets held by mortgage giants Fannie Mae and Freddie Mac.

The following week brought news of the collapse of two iconic Wall Street

investment banks and an announcement by the Federal Reserve on the

creation of a $70 billion pool of funds to rescue troubled financial firms. The

Dow Jones Industrial Average plunged 500 points, its worst one-day decline

in seven years. The week ended with an unprecedented expansion of federal

guarantees on $50 billion of endangered money market investments. Credit

markets were frozen by the end of the month as banks began to hoard cash

and regulators responded to the largest bank failure in the nation’s history

(Cable News Network [CNN], 2008;Reuters, 2008).

These events forever changed financial markets and also served as a

signpost of wider economic malaise variously termed as the ‘‘subprime melt-

down,’’ the ‘‘mortgage default crisis,’’ or simply the ‘‘panic of 2008’’ (Fraily,

2008). The immediate cause of the crisis was the collapse of the residential

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real estate market and a surge of roughly 3 million home foreclosures

(Daniel, 2009;McCoy & Renaurt, 2008). Most of the foreclosures were tied

to defaults on subprime mortgage loans made to borrowers with impaired or

limited credit histories. The subsequent downgrade of tens of billions of

dollars in debt securities backed by these subprime loans resulted in

staggering losses for institutions that had speculated on these investments,

including banks, insurance companies, pension funds, hedge funds, and the

government-sponsored enterprises Fannie Mae and Freddie Mac (Bethel,

Ferrell, & Hu, 2008). The meltdown fed an economic downturn that

accelerated into 2009. High foreclosure rates and deteriorated economic

conditions threatened to undermine the stability of once-thriving neighbor-

hoods and communities now pockmarked with vacant homes and businesses

(Public Broadcasting Service [PBS], 2007). Political leaders issued dire

warnings of further economic collapse and passed a $750 billion program to

save distressed financial institutions – the largest taxpayer-funded bailout in

history (Politico, 2008).

Speculation on the origins of the mortgage default crisis and attempts to

assign blame have thus far extended in two directions. The dominant course

has focused on Wall Street’s so-called culture of greed and the role of

corporate elites as it relates to both the issuance of fraudulent home loans

and the investment banks that packaged and resold them to investors.

This route has produced regulatory investigations and numerous class

action lawsuits as well as some criminal indictments (Bethel et al., 2008;

Boisture, 2008). Here, the list of likely suspects reads like a corporate who’s

who to include JP Morgan Chase, CitiGroup, Countrywide Financial,

Lehman Brothers, and Goldman Sachs. A second but less prominent line of

inquiry has focused on government rather than corporate malfeasance, most

often congressional misbehavior, deregulation, and the facilitating role

played by Fannie Mae and Freddie Mac. In this scenario, blame is assigned

primarily to state actors and the government structures that allow and

encourage the production of corporate harms (Mason, 2008;Kulikowski,

2009;Whalen, 2008).

So, theories on culpability have thus far produced competing narratives;

one that condemns greedy corporate executives and a second that blames

politicians who are either foolish or corrupt. The distinction, however,

probably serves to satisfy the interests of ideology more than the goal of

understanding, because liberals tend to emphasize the role of corporations

and Wall Street ‘‘insiders’’ and conservatives are more likely to blame

government policy (Rudd, 2008;Sheridan, 2009;Weisberg, 2008). The

problem is that both stories offer an overly simplistic explanation of the

JOHN LIEDERBACH18