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Top Financial Stories of 2010: Foreclosures, Financial Reform, Bailouts

2 years ago
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Joann M. Weiner
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Joann M. Weiner
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The ongoing recession and sustained high unemployment have pushed aside the near-collapse of the financial sector as a front-burner worry for Americans. And yet, developments in the financial world are still creating uncertainty and trouble for the world economy. Looking back, here are the five most important -- in some cases troubling -- financial stories of 2010.

1. Foreclosure Fiasco: Robo-Signers, Break-Ins, and the Continuing Housing Slump

The foreclosure debacle dominated the financial news last fall with reports of "robo-signings" by employees who approved foreclosures without even reviewing the documents, break-ins into foreclosed homes by the evicted owners and, incredibly, by the banks themselves, and electronic mortgage recording systems that didn't keep track of who owned the mortgage. With more than half of homeowners in states like Nevada "under water" -- meaning that they owe more on their mortgages than their homes are worth -- the foreclosure crisis easily became the No. 1 financial story of the year. The robo-signing fiasco became so widespread that attorneys general in all 50 states started investigating claims that many foreclosures probably shouldn't have happened at all.

Home foreclosuresBut even though plenty of homeowners probably shouldn't have been kicked out of their homes, there is no question that the foreclosure crisis is real. According to Realty Trac, lenders will foreclose on 1.2 million homes this year, and 2011 will be a "record year" in the same regard.

2. Financial Reform: Protecting Consumers and Preventing Firms From Becoming Too Big to Fail

One would have thought that after nearly suffering a second Great Depression, it would have been easy for Congress to pass significant financial reform. But you would have been wrong -- and wrong also for thinking it would be easy to make bankers pay for the economic turmoil they wrought.

Still, after more than a year of haggling, Congress did manage to pass major financial reform. The Dodd-Frank bill does a lot of good things. It establishes an independent Consumer Financial Protection Bureau (being shaped by Harvard law professor Elizabeth Warren, who originated the idea), and contains measures designed to protect taxpayers against abusive mortgage and credit card lending practices. It attempts to prevent firms from becoming "too big to fail" by giving the government the power to close down large but shaky financial institutions whose collapse might take down the entire system (complete financial meltdown was the major fear in September 2008). It also establishes an "advanced warning system" in the form of a Financial Services Oversight Council to monitor future threats to the financial system, and it imposes restrictions on derivatives trading, which was a major factor in the 2008 crisis.

Despite these positive steps, however, the new law has some major omissions. It does not address the problem of Fannie Mae and Freddie Mac, the giant government-sponsored entities that the feds took over in 2008, nor does it deal with the long-standing preferences for debt financing, via the mortgage-interest deduction in the tax code, which encouraged consumers take on -- and lenders to provide -- more debt than they should have.

3) Crisis in Euroland: Iceland, Greece and Financial Bailouts in the EU

Just when it looked as if the financial crisis might be subsiding, new ones erupted across the European Union (along with an Icelandic volcano) that threatened to topple the EU's common currency, the euro. Ireland was the first country to buckle, followed shortly thereafter by Greece, where riots over fiscal austerity measures threatened the stability of the birthplace of democracy. Fiscal crises elsewhere led analysts to give these countries the unfortunate (but apt) acronym PIIGS -- for Portugal, Ireland, Italy, Greece and Spain -- as shorthand for the profligate spending programs and failure to meet EU budget rules they had exhibited over the years. Perhaps because German banks stood to lose massively if these nations defaulted on their obligations, Germany came to the rescue.

European leaders recently agreed to create a permanent bailout framework to solve the sovereign debt crises in Europe. But, since these plans won't become effective until 2013 and they do nothing to solve the current problem (which requires Germany to, in effect, bail out one EU country after another), it's quite possible that other letters will need to be added to the PIIGS moniker.

4) TARP Payback -- Nearly $700 billion to Be Returned but Fed Provided a $3.3 Trillion Backstop

When Lehman Brothers went bankrupt and AIG, Citigroup, Merrill Lynch, and Goldman Sachs nearly collapsed in September 2008, Congress authorized a $700 billion bailout of the financial industry to prevent a global meltdown that many feared would make the Great Depression seem like a mild slowdown by comparison. Now, to nearly everyone's surprise, the firms that benefited from the Troubled Asset Relief Program have largely paid back these loans, with interest. The program has been so successful that the Congressional Budget Office reports that the TARP will cost U.S. taxpayers no more than a fraction -- about $25 billion -- of the money they lent two years ago.

What these figures fail to report, however, is the phenomenal indirect cost of the bailout. For this information, we must thank Independent Sen. Bernie Sanders of Vermont, who insisted that the Federal Reserve provide details on all of the loans it made during the crisis. The resulting report shows that the U.S. government extended, via the Federal Reserve, some $3.3 trillion -- nearly five times the TARP fund -- to keep the global economy afloat.

This support extended well beyond American financial firms such as Bank of America, Goldman Sachs, and Wells Fargo. The Fed supported General Electric and McDonald's as well as foreign financial firms such as Switzerland's UBS, France's Societe Generale, and Germany's Dresdner Bank. While these loans took place under approved procedures, such as the Term Auction Facility, and, as the Fed explained, were provided to "avoid the disorderly failure of these institutions and the potential catastrophic consequences for the U.S. financial system and economy," there is no doubt that the Federal Reserve went to extraordinary (and until now unreported) lengths to rescue the world economy.

5) Goldman Sachs and Its SEC Settlement; the Accounting Scandal at Lehman Brothers and Elsewhere

The most noteworthy accounting scandal relating to toxic subprime securities and other financial shenanigans concerned a deal known as "Abacus" that was engineered by Goldman Sachs, apparently for the purpose of making a hedge fund manager a heckuva lot of money. As the Securities and Exchange Commission reported, Goldman Sachs allowed hedge fund manager John Paulson to choose the securities that went into the Abacus deal but didn't let on that Paulson had effectively placed a $1 billion bet that the security would collapse, which it did shortly after it was sold to unwitting investors. In April, the SEC sued Goldman for fraud over its failure to disclose the hedge fund manager's role. In July, Goldman Sachs settled with the SEC and paid a $550 million fine, but admitted no wrongdoing in the matter.

Goldman Sachs was not the only investment bank in the news in 2010. In March, a bankruptcy court examiner issued a 2,200-page report detailing accounting tricks known as "Repo 105," which had been taking place at the now-bankrupt investment bank Lehman Brothers since at least 2001. That report, however, would have died on the vine but for the actions of outgoing New York attorney general (and incoming governor) Andrew Cuomo, who sued the accounting firm Ernst & Young, accusing it of helping its client Lehman Brothers engage in massive accounting fraud "involving the surreptitious removal of tens of billions of dollars of securities from Lehman's balance sheet, thereby defrauding the investing public."

Finally, the investigative team at ProPublica just exposed a scheme at Merrill Lynch where one group within the firm essentially paid another group within it to purchase the toxic mortgage-backed securities it couldn't sell on the street. Merrill Lynch, which is now owned by Bank of America, denies that it did anything improper, but ProPublica stands by its analysis.

What to Watch for in 2011

 Although the financial crisis erupted more than two years ago, the fallout will continue for many years to come. As 2010 draws to a close, analysts are warning of looming municipal bankruptcies as communities across the country find it impossible to meet their pension obligations. They are also raising concerns about Fannie Mae and Freddie Mac, which the federal government put into conservatorship in September 2008 (and still provides an enormous amount of assistance to keep them afloat). All this occurs as the nation carries a $13.8 trillion debt burden and the budget deficit grew by $858 billion when President Obama and Congress agreed to extend the Bush tax cuts for two years and unemployment benefits for another 13 months, all part of a 2010 holiday gift to the American people.
Filed Under: Wall Street, Deficit, Analysis, Economy
Tagged: fannie mae, freddie mac, Goldman Sachs, Lehman Brothers, TARP repayment, wells fargo
More articles from Joann M. Weiner »

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6 Comments

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scottee

the top financial stories SHOULD BE: the dollar put back on the gold standard....The Fed audited and ended....the IRS replaced by a fair or flat tax with no loopholes, no deductions, no filing and no social engineering by congress! and all federal employees take a huge pay cut and buy their own IRAs, pay their own health insurance premiums and pay into social security for their retirement!

January 02 2011 at 8:18 AM Report abuse +1 rate up rate down Reply
frank1946

Weiner misses the Biggest Story of all, $ 3.3 Trillion spent on private sector
companies before Paulson asks Amercia for $ 760 Billion...............then the
Feds refuse to disclose where it was spent, it takes a Freedom of Info. Lawsuit to
finally break loose the facts in November 2010.

Biggest Fianacial Scandal in World History, come on JoAnn, wake up ! American
Federal Government has destroyed the Trust of anyone who is rational !

January 02 2011 at 7:56 AM Report abuse +1 rate up rate down Reply
gofsandp

I just received a Making Homes Affordable Mortgage Modification. Took 2+ years but it is retro-active to about a year ago. Thank You Mr. President for making this program available. My wife is delighted. Things are looking up, now I just need to file a bankruptcy(couldn't while doing the modification). Maybe this decade will be better than the last!

January 01 2011 at 11:08 PM Report abuse rate up rate down Reply
ettu

All show and no substance. The only thing we are assured of, is, the American people will BITE THE BULLET, while the politicians continue to protect their big money supporters, and work to increase their own wealth and power.

December 31 2010 at 8:05 AM Report abuse rate up rate down Reply
outfront2

Good article Joann and you are right on target with the fact our law makers of all parties did little or nothing to correct the problems. It would be great if someone would research how much money the congress got from PACs representing these firms. The average citizen can see these contributions but have no way of checking out how they are linked to the special interest groups.

December 30 2010 at 10:15 AM Report abuse +3 rate up rate down Reply
David Zapen

Has the derivatives time bomb been defused, the biggest reason to bailout AIG? www.usdebtclock.org notes the $600T+ in derivatives that must be unraveled, compared to the $62T in global wealth. Also, use www.bls.gov/news.release/empsit.t15.htm to track both 9.8% U-3 unemployment and 17.0% U-6 un- and underemployment before visiting www.shadowstats.com to see how long-term discouraged workers combined with the other numbers to plummet from 22.5% to 21.6% in a month. Maybe if more workers were hired to process mortgages, fewer mortgages would have mis-filed and subject to challenge then fewer foreclosures would have been necessary, including at least one (thwarted) house auction despite timely payments.

December 30 2010 at 1:40 AM Report abuse rate up rate down Reply

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