Before the 2008 Mortgage Collapse, What Was Wall Street?

A decade after the financial crisis, the casualties of the economic near-collapse are fading from memory. But that period of turmoil permanently altered the U.S. economy and the financial system.

Here are 10 common questions about the crisis and its lasting impact:

1. What was the short-term impact of the financial crisis on the economy?

The crisis was the worst U.S. economic disaster since the Great Depression. In the United States, the stock market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009. Unemployment climbed, peaking at 10 percent in October 2009. Americans lost $9.8 trillion in wealth as their home values plummeted and their retirement accounts vaporized.

In all, the Great Recession led to a loss of more than $2 trillion in global economic growth, or a drop of nearly 4 percent, between the pre-recession peak in the second quarter of 2008 and the low hit in the first quarter of 2009, according to Moody’s Analytics.

“It was such a shock to the economic system that it unleashed dynamics that we still don’t understand fully,” said Joe Brusuelas, chief economist at RSM, an audit and advisory firm.

2. What has been the long-term impact on the economy?

The U.S. economy has largely recovered. In late August, the U.S. stock market set a record for the longest-running upswing in its history, replenishing the retirement accounts of workers who stayed invested through bouts of volatility. Home prices have also rebounded, pushing total housing wealth to top the levels seen in the pre-recession peak. Unemployment is low, at 3.9 percent in July.

“It’s fair to say the crisis was a financial calamity for homeowners everywhere, but now almost everyone has recovered what they lost in that downturn,” said Mark Zandi, chief economist at Moody’s Analytics.

Still, the recovery has not buoyed all consumers equally. Many workers have struggled to land jobs that paid as well as the positions they had before the recession. That shift, combined with the time spent out of work and other drops in productivity since the crisis, has led to a loss of about $70,000 in lifetime income for every American, according to an estimate from the Federal Reserve Bank of San Francisco. At the end of 2017, 4.4 million homeowners were underwater on their mortgage, meaning they owed more than their homes were worth, according to the real estate company Zillow.

3. Whatever happened to Fannie Mae and Freddie Mac?

In 2008, the government seized control of the troubled mortgage giants as the housing market unraveled and the companies’ losses piled up. Taxpayers pumped billions into the companies, but over the past few years Fannie Mae and Freddie Mac, which buy mortgages from lenders and then package them into securities to sell to investors, have been spewing profits that feed into government coffers. Fannie Mae, for example, took $119.8 billion in taxpayer bailout money but has handed over $167.3 billion to the Treasury Department. The smaller Freddie Mac took $71.6 billion in bailout money and has turned over $112.4 billion in profits.

The companies remain under government conservatorship, and there is little urgency in Congress to tackle the complicated task of determining their futures. Some proposals have called for Fannie and Freddie to be privatized, others to abolish them all together. Further complicating the fight: Some Wall Street investors say Fannie Mae and Freddie Mac’s profits should be going to shareholders and not the government.

In the meantime, Fannie and Freddie still back about 60 percent of U.S. mortgages, and lawmakers appear hesitant to disturb the status quo, housing experts say.

“There is a risk that if you get it wrong, you are really going to do damage to a market that is essential to millions of Americans,” said Michael Barr, a University of Michigan Law School professor who served in the Treasury Department in 2009 and 2010.

4. How did the crisis change the housing market?

The housing market was ground zero of the crisis. The market crashed as homeowners with subprime and other troublesome loans defaulted at record levels. Home prices dropped, and millions lost their homes to foreclosure.

The market has largely recovered, with home prices rising and far fewer people behind on their mortgages. Regulators have also established new restrictions on the types of loans banks could offer.

“Remember ninja loans? No income, no assets, no problem? We have come a long way,” Brusuelas said.

But the housing recovery has left behind low-income, low-credit-score borrowers, economists say. Rather than risk making loans to those buyers, banks have focused more intensely on those with pristine credit and buying more-expensive homes, they say.

“There is pressure building to change this,” said Aaron Terrazas, a senior economist at Zillow.

5. Are there still “too big to fail” banks?

Yes. In fact, many of the country’s biggest banks are bigger now than they were before the financial crisis. JPMorgan Chase has $2.5 trillion in assets, compared with $1.5 trillion in 2007. Bank of America has about $2.3 trillion in assets, compared with $1.7 trillion in 2007. The assets of Wells Fargo are near $2 trillion, more than double what they were right before the crisis.

“If and when another crisis hits, the biggest players will be far larger than they were during the last crash,” according to a 2017 S&P Global Market Intelligence report.

Some policymakers, including Minneapolis Federal Reserve President Neel Kashkari, continue to call for a breakup of the big banks, but the idea has not gained much traction. Lawmakers considered trying to limit the size of banks while debating legislation to overhaul the financial industry but ultimately rejected the idea. Instead, the 2010 financial-overhaul law, the Dodd-Frank Act, handed regulators broad new powers to police the industry, and the biggest banks undergo the most intense scrutiny.

“Essentially, too big to fail has been solved — taxpayers will not pay if a bank fails,” Jamie Dimon, chief executive of JPMorgan, the largest bank in the country, wrote in a 2017 letter to shareholders.

6. What ever happened to Lehman Brothers?

Many point to Sept. 15, 2008 — the day Lehman Brothers, then the nation’s fourth-largest investment bank, filed for bankruptcy — as a turning point in the crisis. After galloping to the rescue of other major financial institutions, the federal government drew the line with Lehman, allowing the firm to collapse.

A decade later, a bankruptcy court is still wading through the wreckage. The bank’s trustee has sold thousands of its assets and paid out more than $130 billion to settle claims against it. But 365 former Lehman Brothers employees are still petitioning to recover millions in lost salaries and bonuses, potentially keeping the case in court for years to come.

“When we started out ten years ago, we faced the chaotic conditions of a global liquidity crisis and had to make immediate decisions in the ‘Fog of Lehman,’ ” James W. Giddens, liquidation trustee for Lehman Brothers, said in a statement. “It was a monumental amount of work. We are proud that we were able to recover as many assets as possible for those distributions in an efficient and fair process.”

7. Did anyone go to jail for causing the financial crisis?

No major bank CEOs were criminally charged with causing the financial crisis. Federal prosecutors considered cases against some high-profile figures, including Angelo Mozilo, the chief executive of mortgage giant Countrywide Financial, but ultimately didn’t pursue them. In 2013, Attorney General Eric H. Holder Jr. said that some financial institutions had become “so large” that it made it “difficult for us to prosecute them.”

Prosecutors would have needed evidence that the high-ranking executives were personally involved in criminal conduct to bring a case, said Jacob Frenkel, a former federal prosecutor and a partner at the law firm Dickinson Wright. “Many of the decisions in institutions that gave rise to the financial crisis, and certainly the design of the aggressive practices and instruments that triggered the crisis, occurred at levels well below the big-name executives,” he said.

Dozens of executives from smaller banks have been prosecuted by the Office of the Special Inspector General for the Troubled Asset Relief Program, which was established to police firms that received bailout funds. But even SIGTARP has expressed frustration with the difficulty of prosecuting executives at the top firms.

To be sure, the banking industry did pay a hefty price for the crisis — billions in fines. Bank of America, for example, paid a whopping $17 billion to resolve allegations that it knowingly sold faulty mortgage securities that contributed to the financial crisis. JPMorgan Chase paid $13 billion.

8. Is Wall Street still handing out big bonuses?

Sort of. Wall Street bonuses are nearing record highs again. The average bonus payout reached $184,220 last year, a 17 percent increase compared with the previous year and the closest Wall Street has come in more than a decade to its all-time high of $191,360 in 2006, according to the New York state comptroller.

Wall Street’s critics argued that excessive bonuses helping fuel the financial crisis, and Congress attempted to address the issue in Dodd-Frank, requiring regulators to establish new rules aimed at stopping executives from making risky financial bets to boost their pay and then collecting large bonuses before the fallout is clear. But the rules are years overdue and have yet to be finalized. Trump-era regulators are not expected to push the matter further.

“Ten years after the crisis, the cause — venal pay incentives — remain unaddressed by Washington,” said Bart Naylor, a financial-policy advocate for the nonprofit consumer group Public Citizen.

Industry officials say the proposed rules were too complicated and unnecessary. Banks have already addressed the problem, they say, noting that most bonuses are handed out over several years rather than all at once.

9. Did all the companies bailed out by taxpayers pay the money back?

Pretty much. The Treasury Department injected $412 billion into banks, carmakers and other struggling companies through the Troubled Asset Relief Program, or TARP. As of the end of last year, it had collected everything it had paid out in bailout funds and then some, leaving the government with a profit of $12 billion.

Only about half of the banks and other companies that the Treasury Department invested in repaid in full, said Christy Goldsmith Romero, head of SIGTARP. Some companies paid dividends and interest, which helped make up for the program’s losses on some companies, she said. Taxpayers, for example, lost about $11 billion on the bailout of General Motors.

A few banks haven’t finished paying the government back. But they owe a total of less than $100 million, a small portion of the money loaned out. Also, TARP carved out billions to help distressed homeowners by paying banks to lower their interest rates and monthly payments. Big banks, including Wells Fargo, are expected to continue receiving money through that program until 2023.

10. Is the financial system safer than it was before the crisis?

Generally, economists agree that the financial system is safer. The 2010 Dodd-Frank Act put new guardrails around the banking sector. The country’s biggest banks must now undergo periodic “stress tests” to prove they could survive another crisis and draw up “living wills” so that they could be dismantled in an emergency without requiring a taxpayer bailout.

But Congress and regulators have recently begun loosening some of Dodd-Frank’s key requirements, allowing small and midsize banks to escape some of the most rigorous rules, for example. Critics warn that such efforts could make another crisis more likely.

“Many holes in our financial regulatory system are now plugged,” said Aaron Klein, policy director at the Center on Regulation and Markets at the Brookings Institution. “Are we impervious to another crisis? No. It’s human nature. Cars are safer today than they were 30 years ago, but you can still get into an accident.”