TEHRAN(Bazaar) – “The Banks Did It, An Anatomy of the Financial Crisis” is a book written by Neil Fligstein and published by Harvard University Press.
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, Neil Fligstein argues, is the convergence of major U.S. banks on an identical business model: extracting money from the securitization of mortgages. But how, and why, did this convergence come about?
The Banks Did It carefully takes the reader through the development of a banking industry dependent on mortgage securitization. Fligstein documents how banks, with help from the government, created the market for mortgage securities. The largest banks—Countrywide Financial, Bear Stearns, Citibank, and Washington Mutual—soon came to participate in every aspect of this market. 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 market had turned on them in the mid-2000s.
With the structural features of the banking industry in view, the rest of the story falls into place. Fligstein explains how the crisis was produced, where it spread, why regulators missed the warning signs, and how banks’ dependence on mortgage securitization resulted in predatory lending and securities fraud. An illuminating account of the transformation of the American financial system, The Banks Did It offers important lessons for anyone with a stake in avoiding the next crisis.
Following is the interview with Professor Neil Fligstein about this book:
Neil Fligstein is Professor of Sociology at the University of California, Berkeley, and Director of the Center for Culture, Organization, and Politics at the Institute for Research on Labor and Employment. His previous books include The Transformation of Corporate Control, The Architecture of Markets, and Euroclash. He is a member of the American Academy of Arts and Sciences.
Bazaar: What has been your main question in this book?
Fligstein: My book is an attempt to provide an explanation for the financial crisis that began in the U.S. in 2008 and spread around the developed world by 2009. The book demonstrates that the existing accounts of what happened are either incomplete or wrong. What is missing is a focus on what the banks were actually doing to make themselves so vulnerable to the massive crisis that resulted in the bankruptcy of most of the largest banks in the U.S. and many in Western Europe.
Bazaar: What Hypothesis did you use to answer this question? What is your central argument?
Fligstein: My central argument is that all of the largest the banks in the US came to be involved in a single industry for most of their profits. That industry, the mortgage securitization industry provided banks who comprised less than 10% of the American economy with 40% of the profits in the entire economy at its peak. The book documents the historical shift from the savings and loan model of mortgage financing whereby local banks provided loans to homeowners to the mortgage securitization model where those mortgages became the raw material for securities bought and sold around the world. The book shows that by 2008, the largest banks had become vertically integrated. They were involved in mortgage origination, the production and sale of mortgage securities, and the buying and selling of those securities on their own accounts. While this was profitable, banks were making money at every part of the process, mainly by using money they had borrowed on a short term basis. The book shows how this unravelled beginning in 2006. That unravelling left banks highly vulnerable as they could not pay back what they had borrowed to create this business. The book shows that many of the features of what happened can only be understood by making sense of the business models of the largest banks.
Bazaar: What was the necessity of writing this book?
Fligstein: The causes of the crisis are still not well understood. Regulators clearly did not understand what was happening at the time. Their current view of what happened is relatively narrow. The purpose of the book is to suggest that regulatory authorities should be skeptical of any one industry that appears to be making hyper profits. Banks and other financial institutions are particularly prone to such excess and their business models require deep understanding and scrutiny in order to prevent disasters such as the world wide financial crisis. Banks as the financial intermediaries in modern societies are particularly vulnerable to these kinds of crises.
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