The Beast Within:
An Analysis of the 2008 Financial Crisis in New York City
Imagine having everything you worked up for during your entire life vanish in the blink of an eye.
Imagine having everything you worked up for during your entire life vanish in the blink of an eye. Imagine being a parent with two beautiful children about to go to college and suddenly have to say, “Sorry, we can’t send you there right now, there are more important things to deal with.” Imagine having to sell the house you lived in for your entire life and not being able to get a loan for a new one. Imagine being a victim of the 2008 Financial Crisis.
The beginnings of the 2008 financial crisis started back in 2001, specifically September 11, 2001. When 9/11 happened, the already struggling economy that was coming out of the tech bubble recession was hit. In response, the federal reserve started to lower their rates until in 2003; they hit a federal fund rate of 1% which in banking, is essentially nothing. The low federal funds' rates were put into place as to encourage trading, spending, and borrowing money, so the U.S economy doesn’t become stagnant. Luckily, this worked, and the economy started to repair itself by 2002. As interest rates began to decrease, the 30-year house mortgage became very cheap and threw the real estate industry into a crazy state where everybody was buying houses with extremely low-interest rates attached (Barnes).
While the housing industry was thriving in this new age of low-interest rates, Wall Street had its fun as well with banks with their new techniques. One of those techniques was asset-backed security. While the ideas of asset-backed securities had been around since before the crash, Wall Street developed some shady tactics to make it even more profitable. Firstly, an asset backed security is a group of assets that have a similar value/stream of money coming in. Group them all together in one security and collect all the money in one place and then paid to investors. When the credit agencies started to rate the securities, the beast that was the crisis came out. An A+ security is the best that there can be and means that you have a very good chance to get your money back. The lowest rating a security can have is a C which means it is very high risk, and the investor/bank does not have a good chance of getting the money back. if a person buys a group of A grade loans in a security, they will have a very good chance of getting their investment back and then some. If a person buys a group of C grade loans in a security, they will either make a lot of money because the asset backed security cost so little and the reward was so big, or some or all of the loans in the security will default and the investor will lose everything in said security. It will be basically worth nothing. A prime loan is given to a person with a good credit score and a very like chance to repay the loan. A subprime loan is a much more-risky loan because it is given to a person who was not eligible for a prime loan because they didn’t have a high enough credit score. The banks started to package these C grade high-risk loans with the A grade low-risk loans. Usually, an investor who saw a group of C grade assets would not normally buy the assets because of how much risk was involved. Since the groups of assets had A grade assets alongside the C grade assets, the credit companies rated the entire group as an A+. The banks didn’t care if the subprime mortgages defaulted because by then it would be in an investors hands and the bank wouldn’t have to deal with the aftermath (Barnes).
According to Mark Uh, a writer for Trulia, the 2008 Financial Crisis was not limited to the walls of Wall Street; it had a ripple across the entire United States. When the crash hit, a large amount of the population moved to renting instead of owning a home and for people who were ready to buy their first house had to postpone their purchase until they could get a loan from the banks. Contrary to popular belief, wealthy persons and individuals in the upper middle class to upper class also had problems dealing with the crisis. More people switched to renting during this hard time compared to the lower levels. This is because the poorer population was already renting when the crisis hit. There were also variations and differences in the harshness in which different groups were affected. Of all the various ethnic groups, Hispanic people had a rate of 66% of people in the group switch to renting. The next group was African-Americans, who had rates as high as 61% of the group switch to renting. The third most likely group to start renting was multi-racial groups who had rates of 56%. The only two groups that had rates of people who switched to renting under 50% were white people and people of Asian descent. Overall, though, there was a substantial increase in the number of renters during the years leading up to and following the financial crisis. There was also a 22.3% in the renting price across the 50 largest housing markets. Finally, there was an inflation rate of 17%, and the average household income dropped 4.2% across the country.
The state of New York suffered the same fate as the rest of the states in America; there were large variations of how many subprime mortgages were loaned out to each local government. For example, out of 150,000 subprime mortgage loans that were given out, 73 percent (109,500) were given out in the downstate area, mainly consisting of New York City. (DiNapoli) New York State was hit relatively lightly by the 2008 crash as the issued far fewer loans than some states on the west coast. New York City was had a very high density of loans compared to the rest of the state. Even though a lot of the middle class was renting apartments, as the crisis started to gain ground, the renting prices started to rise. Normally, when the renting prices increase, the income amounts increase and there isn’t a problem because they are relative to each other. The problem arose when the renting rates increased from 29.7% to 31.5% (Uh) which may not seem like a large rise but it can have devastating effects nonetheless. While the renting prices were rising, the national income average was decreasing by a total of 5.8% following 2006. It was the culmination of the rising renting prices and decreasing income rates that led New Your City down a deep, dark spiral that was almost impossible to climb out of.
Wall Street was hit incredibly hard mainly because there was an increase in commerce of the subprime loans. Washington Mutual (WaMu) executives started the high-risk lending strategies and increased sales to Wall Street of High-Risk loans. WaMu defined a high-risk loan as a loan with a Loan to Value (LTV) ratio to equal or greater than 90%. (62, Levin) WaMu gave these high-risk loans mainly to people with “low credit scores,” which is defined by having a FICO score of 620 or less for home equity loans, and other loans. Even though WaMu is located in Long Beach, it still had negative effects on New York City. The biggest hit to Wall Street was not to the banks, but to the people working for the large firms, banks, and departments. A total of 2.6 million people lost their jobs in the aftermath of the crash. The banks were left with effectively nothing because all of the mortgages that they were collecting money from defaulted, therefore leaving the banks without money to trade to other banks in the U.S and in foreign countries. In short, the 2008 financial crisis had devastating effects on the people associated with Wall Street, the banks that were giving out risky loans, and the firms which were giving out risky loans to people who couldn’t pay them back.
Since the 2008 housing/financial crisis happened 9 years ago, the U.S government and other international communities have learned and proposed ways in which to reform. Basel III, a set of proposals created by the international Basel Committee which sets a new standard for the global banking sector. In the U.S, the government passed the Dodd-Frank Act and the Consumer Protection Act to help combat the unfair practices of the banking industry. The Dodd-Frank Act essentially increases oversight in companies that are listed as a systematic risk if they were to fail. The act promoted transparency in companies and tried to protect the consumer and have advanced warning for economic instability in the future. The Consumer Protection Act was put in place to prevent “predatory” mortgage lending and making it easier for the consumer to understand the terms of the mortgage before signing the paperwork. While these Act and proposals are a large step in the right direction, there is still a lot to be done. Joshua Jelly-Schapiro argues that there should be “strong government regulation of the financial sector is essential, as is the re-implementing of old rules against, for example, mingling the business and assets of investment banks, commercial banks, and insurance companies.” (Jelly-Schapiro) He also describes the Glass-Stegall Act, which enforces the same rules, was put into place as a result of the lessons learned from the stock market crash of 1929. Finally, Mr. Schapiro argues that we forgot many of the lessons that we once knew and that if we forget them again, the economic devastation will be unparalleled.
The beginnings of the 2008 financial crisis started back in 2001, specifically September 11, 2001. When 9/11 happened, the already struggling economy that was coming out of the tech bubble recession was hit. In response, the federal reserve started to lower their rates until in 2003; they hit a federal fund rate of 1% which in banking, is essentially nothing. The low federal funds' rates were put into place as to encourage trading, spending, and borrowing money, so the U.S economy doesn’t become stagnant. Luckily, this worked, and the economy started to repair itself by 2002. As interest rates began to decrease, the 30-year house mortgage became very cheap and threw the real estate industry into a crazy state where everybody was buying houses with extremely low-interest rates attached (Barnes).
While the housing industry was thriving in this new age of low-interest rates, Wall Street had its fun as well with banks with their new techniques. One of those techniques was asset-backed security. While the ideas of asset-backed securities had been around since before the crash, Wall Street developed some shady tactics to make it even more profitable. Firstly, an asset backed security is a group of assets that have a similar value/stream of money coming in. Group them all together in one security and collect all the money in one place and then paid to investors. When the credit agencies started to rate the securities, the beast that was the crisis came out. An A+ security is the best that there can be and means that you have a very good chance to get your money back. The lowest rating a security can have is a C which means it is very high risk, and the investor/bank does not have a good chance of getting the money back. if a person buys a group of A grade loans in a security, they will have a very good chance of getting their investment back and then some. If a person buys a group of C grade loans in a security, they will either make a lot of money because the asset backed security cost so little and the reward was so big, or some or all of the loans in the security will default and the investor will lose everything in said security. It will be basically worth nothing. A prime loan is given to a person with a good credit score and a very like chance to repay the loan. A subprime loan is a much more-risky loan because it is given to a person who was not eligible for a prime loan because they didn’t have a high enough credit score. The banks started to package these C grade high-risk loans with the A grade low-risk loans. Usually, an investor who saw a group of C grade assets would not normally buy the assets because of how much risk was involved. Since the groups of assets had A grade assets alongside the C grade assets, the credit companies rated the entire group as an A+. The banks didn’t care if the subprime mortgages defaulted because by then it would be in an investors hands and the bank wouldn’t have to deal with the aftermath (Barnes).
According to Mark Uh, a writer for Trulia, the 2008 Financial Crisis was not limited to the walls of Wall Street; it had a ripple across the entire United States. When the crash hit, a large amount of the population moved to renting instead of owning a home and for people who were ready to buy their first house had to postpone their purchase until they could get a loan from the banks. Contrary to popular belief, wealthy persons and individuals in the upper middle class to upper class also had problems dealing with the crisis. More people switched to renting during this hard time compared to the lower levels. This is because the poorer population was already renting when the crisis hit. There were also variations and differences in the harshness in which different groups were affected. Of all the various ethnic groups, Hispanic people had a rate of 66% of people in the group switch to renting. The next group was African-Americans, who had rates as high as 61% of the group switch to renting. The third most likely group to start renting was multi-racial groups who had rates of 56%. The only two groups that had rates of people who switched to renting under 50% were white people and people of Asian descent. Overall, though, there was a substantial increase in the number of renters during the years leading up to and following the financial crisis. There was also a 22.3% in the renting price across the 50 largest housing markets. Finally, there was an inflation rate of 17%, and the average household income dropped 4.2% across the country.
The state of New York suffered the same fate as the rest of the states in America; there were large variations of how many subprime mortgages were loaned out to each local government. For example, out of 150,000 subprime mortgage loans that were given out, 73 percent (109,500) were given out in the downstate area, mainly consisting of New York City. (DiNapoli) New York State was hit relatively lightly by the 2008 crash as the issued far fewer loans than some states on the west coast. New York City was had a very high density of loans compared to the rest of the state. Even though a lot of the middle class was renting apartments, as the crisis started to gain ground, the renting prices started to rise. Normally, when the renting prices increase, the income amounts increase and there isn’t a problem because they are relative to each other. The problem arose when the renting rates increased from 29.7% to 31.5% (Uh) which may not seem like a large rise but it can have devastating effects nonetheless. While the renting prices were rising, the national income average was decreasing by a total of 5.8% following 2006. It was the culmination of the rising renting prices and decreasing income rates that led New Your City down a deep, dark spiral that was almost impossible to climb out of.
Wall Street was hit incredibly hard mainly because there was an increase in commerce of the subprime loans. Washington Mutual (WaMu) executives started the high-risk lending strategies and increased sales to Wall Street of High-Risk loans. WaMu defined a high-risk loan as a loan with a Loan to Value (LTV) ratio to equal or greater than 90%. (62, Levin) WaMu gave these high-risk loans mainly to people with “low credit scores,” which is defined by having a FICO score of 620 or less for home equity loans, and other loans. Even though WaMu is located in Long Beach, it still had negative effects on New York City. The biggest hit to Wall Street was not to the banks, but to the people working for the large firms, banks, and departments. A total of 2.6 million people lost their jobs in the aftermath of the crash. The banks were left with effectively nothing because all of the mortgages that they were collecting money from defaulted, therefore leaving the banks without money to trade to other banks in the U.S and in foreign countries. In short, the 2008 financial crisis had devastating effects on the people associated with Wall Street, the banks that were giving out risky loans, and the firms which were giving out risky loans to people who couldn’t pay them back.
Since the 2008 housing/financial crisis happened 9 years ago, the U.S government and other international communities have learned and proposed ways in which to reform. Basel III, a set of proposals created by the international Basel Committee which sets a new standard for the global banking sector. In the U.S, the government passed the Dodd-Frank Act and the Consumer Protection Act to help combat the unfair practices of the banking industry. The Dodd-Frank Act essentially increases oversight in companies that are listed as a systematic risk if they were to fail. The act promoted transparency in companies and tried to protect the consumer and have advanced warning for economic instability in the future. The Consumer Protection Act was put in place to prevent “predatory” mortgage lending and making it easier for the consumer to understand the terms of the mortgage before signing the paperwork. While these Act and proposals are a large step in the right direction, there is still a lot to be done. Joshua Jelly-Schapiro argues that there should be “strong government regulation of the financial sector is essential, as is the re-implementing of old rules against, for example, mingling the business and assets of investment banks, commercial banks, and insurance companies.” (Jelly-Schapiro) He also describes the Glass-Stegall Act, which enforces the same rules, was put into place as a result of the lessons learned from the stock market crash of 1929. Finally, Mr. Schapiro argues that we forgot many of the lessons that we once knew and that if we forget them again, the economic devastation will be unparalleled.
Works Cited
Barnes, Ryan. "The Fuel That Fed the Subprime Meltdown." Investopedia. Investopedia, 14 Mar. 2017. Web. 22 Mar. 2017.
DiNapoli, Thomas P. "Meltdown: The Housing Crisis and Its Impact on New York State’s Local Governments." United States Senate. United States Senate, 23 Feb, 2017. Web. 14 Mar. 2017.
Goldman, David. "Worst Year for Jobs since '45." CNN Money. Cable News Network, 9 Jan. 2009. Web. 22 Mar. 2017.
Levin, Carl. "Wall Street and The Financial Crisis: Anatomy of a Financial Collapse." Wall Street and The Financial Crisis: Anatomy of a Financial Collapse. United States Senate. United States Senate, n.d. Web. 28 Feb. 2017.
Schapiro, J. (2017, March 4). Personal Interview.
Smith, Patricia. "Turmoil on Wall Street: The Impact of the Financial Sector Meltdown On New York’s Labor Market." Turmoil on Wall Street. New York Government, June 2009. Web. 22 Mar. 2017.
Uh, Mark. "From Own to Rent: Who Lost the American Dream?" Trulia's Blog. Trulia, 11 Feb. 2011. Web. 22 Mar. 2017.
Waters, Rep. Maxine. "How to Prevent Another Financial Crisis." American Banker. American Banker, 19 Sept. 2013. Web. 23 Mar. 2017.
Barnes, Ryan. "The Fuel That Fed the Subprime Meltdown." Investopedia. Investopedia, 14 Mar. 2017. Web. 22 Mar. 2017.
DiNapoli, Thomas P. "Meltdown: The Housing Crisis and Its Impact on New York State’s Local Governments." United States Senate. United States Senate, 23 Feb, 2017. Web. 14 Mar. 2017.
Goldman, David. "Worst Year for Jobs since '45." CNN Money. Cable News Network, 9 Jan. 2009. Web. 22 Mar. 2017.
Levin, Carl. "Wall Street and The Financial Crisis: Anatomy of a Financial Collapse." Wall Street and The Financial Crisis: Anatomy of a Financial Collapse. United States Senate. United States Senate, n.d. Web. 28 Feb. 2017.
Schapiro, J. (2017, March 4). Personal Interview.
Smith, Patricia. "Turmoil on Wall Street: The Impact of the Financial Sector Meltdown On New York’s Labor Market." Turmoil on Wall Street. New York Government, June 2009. Web. 22 Mar. 2017.
Uh, Mark. "From Own to Rent: Who Lost the American Dream?" Trulia's Blog. Trulia, 11 Feb. 2011. Web. 22 Mar. 2017.
Waters, Rep. Maxine. "How to Prevent Another Financial Crisis." American Banker. American Banker, 19 Sept. 2013. Web. 23 Mar. 2017.