More than a decade after the 2008 financial crisis plunged the world economy into recession, we still lack an adequate explanation for why it happened. Existing accounts identify a number of culprits—financial instruments, traders, regulators, capital flows—yet fail to grasp how the various puzzle pieces came together. The key is understanding what the banks were doing. There was a convergence of major U.S. banks on an identical business model: the vertical integration of originating and securitizing mortgages in order to maximize the extraction of profit from the securitization of mortgages. In my talk I discuss how all of the major U.S. banks and many European banks became dependent on mortgage securitization. Each firm originated mortgages, issued mortgage-backed securities, sold those securities, and, in many cases, acted as their own best customers by purchasing the same securities. Entirely reliant on the throughput of mortgages, these firms were unable to alter course even when it became clear that the mortgage market had turned on them in 2006. With the structural features of the banking industry in view, the rest of the story falls into place. I explain how the crisis was produced, why it spread so fast and so deeply, how banks’ dependence on mortgage securitization resulted in predatory lending and securities fraud, and most importantly, how regulators missed what was happening. I end by discussing how next time, it really could be different.
Neil Fligstein is the Class of 1939 Chancellor’s Professor in the Department of Sociology at the University of California. He has made research contributions to the fields of economic sociology, organizational theory, political sociology and social stratification. He is the author of eight books including The Transformation of Corporate Control (Harvard University Press, 1993), The Architecture of Markets (Princeton University Press 2001), Euroclash (Oxford University Press, 2008), and A Theory of Fields (with Doug McAdam, Oxford University Press, 2012). This summer he published The Banks Did It: An Anatomy of the Financial Crisis (Harvard University Press, 2021).