CHAPTER 17 A LONG STRANGE TRIP: THE STATE AND MORTGAGE SECURITIZATION, 1968 - 2010

NEIL FLIGSTEIN AND ADAM GOLDSTEIN

Introduction

In the past 40 years, states and market actors have co-determined the structure of the financial markets (Preda 2007). But the literature on the sociology of finance, motivated especially by Callon (1998), has been quiet on these sets of relationships. We want to show that by studying the financial tools outside of the context of the state and the banks, one gets at best an incomplete view of what has happened in financial markets, and at worse a misleading view. Governments do not just act as regulators of financial markets. Indeed, governments have pioneered most of the tools of modern finance including mortgage-backed securities (MBSs), the financial instruments that were at the core of the financial meltdown of 2007-10 (Quinn 2008). Government policies are oriented toward creating credit for homeowners, and for consumers more generally. Governments have often stepped into financial markets and created either social programs to promote their policies or government-owned or sponsored enterprises to stimulate particular policies.

Firms that populate the financial sector have themselves evolved their money-making activities over time. Much of this has been in response to opportunities laid out by gov­ernment regulation. So, for example, investment banks entered the mortgage-backed securities market rather late. They did so at the behest of the government-sponsored enterprises (hereafter GSE), Freddie Mac and Fannie Mae, who wanted private sector participation in the underwriting of mortgage-backed securities. During the 1990s, Countrywide Financial pioneered the strategy of the vertical integration of the mort­gage market by originating loans, wholesaling them, becoming underwriters to package them into bonds, and operating as both a seller of bonds and a holder of bonds. Countrywide also pioneered the subprime market by offering people with less-than- stellar credit the opportunity to buy a house. The largest of the commercial banks (Bank of America, Wells Fargo, Citibank), the remaining large savings and loan (S&L) banks (Indy Mac and Washington Mutual), and several of the investment banks (Lehman Brothers, Bear Stearns) followed Countrywide’s lead. The GSE played a critical role in providing an implied guarantee for conventional (or prime) mortgages. The absence of the GSE from subprime and jumbo mortgage securitization markets encouraged private firms to focus on growing these riskier segments after 2003 since the lack of government guarantee meant higher returns. In the place of government guarantees against default came an explosion in financial engineering, or the use of complex models and credit default obligations (CDO) instruments that restructured pools of risky mortgages into AAA-rated securities.

By focusing primarily on the financial instruments themselves, one misses the con­text in which these instruments emerge and assume importance. One also cannot appre­ciate the role they played in propelling the growth of new markets and subsequent financial meltdown. Indeed, the rapid growth of CDO and credit default swaps (CDS) were the result of the tactics of almost all of the major US banking entities to enter many parts of the mortgage market and use those instruments to help them make money. They were able to capture fees at all points in the process and borrow money in order to hold CDO, thereby becoming leveraged in the process. This system was created with the aid of policymakers and Fannie Mae and Freddie Mac. But the system was predicated on home prices continuing to increase. The slowing of that increase, beginning in 2006, put pressure on all of the businesses of the largest banking entities. The proximate cause of the crisis was that banks were unable to pay back those who they had borrowed money from in order to buy CDO. While CDO instruments were at the heart of the mortgage crisis, they mattered because of their embeddedness in the way that firms were making money.

Financial crises are not new (Reinhart and Rogoff 2009). Generally, financial crises are caused by some form of asset bubble. Governments fail to act to control the bubble and observers come to think that the party will go on forever. The crisis of 2007-10, at its core, was based on the bubble in housing prices in the United States. But the link between the government, the banks, and that bubble are not well understood. Our goal is to pro­vide a brief account of the mortgage securitization industry: the role of government in creating the market; the role of firms and innovative actors in constructing the market; and the evolution of financial products as pragmatic solutions for sellers to overcome objections of buyers. We show how firms came to sow the seeds of their own destruction in 2002-7. Ironically, the US government, which pioneered MBS instruments during the 1960s as a way to stimulate home ownership without directly involving itself in the mort­gage industry, now fully owns or controls over half of the mortgage debt in the US.

This chapter has six parts. First, we propose a general way to understand the financial cycle and the link between governments, firms, and the growth of financial products. Then, we consider the case of the market for mortgage securitization. Next, we document how the government invented the market in the 1960s. We move on to the building of the market from 1970 until 1993. Then, we examine how the industry changed from 1993-2007 and how this caused the crisis. We end by considering the unfolding of the crisis and briefly assess various arguments about the government’s role in causing it. In the conclusion, we return to a broader discussion of governments, financial crises, finan­cial instruments, and regulation.
過去40年的時間，國家和市場行動者共同決定金融市場的結構(Preda2007)。但是在金融社會學的文獻中卻是相對沉默的一組關係。作者認為在國家和銀行的角色外部去研究金融工具，好的狀況下得到不完整的視野，最壞的情形下甚至是誤導的想法。政府不僅僅是作為金融市場的監督者，事實上政府更是當代大部分的金融工具包含MBS(mortgage-backed securities)的創新者，2007-10中金融系統崩潰的核心金融工具。政府的政策傾向對房屋擁有者和更廣泛的消費者製造信用，政府經常透過社會計畫或政府擁有或GSE贊助的企業去刺激鼓勵特別的政策。

企業在這段期間也轉移有自己的金融部門逐漸形成他們的賺錢的活動，大部分是因應政府監管鬆綁製造的機會。例如，投資銀行進入房貸抵押證券的市場，經手聽命於政府贊助的企業像Freddie Mac和 Fannie Mac要求私部門參與MBS的保險業務。1990年代期間美國國家金融公司Countrywide Financial創新垂直整合房貸市場的策略創作成借款，整批包裝成債券賣出去成為證券包銷商，同時成為債券的銷售者和擁有者。美國國家金融服務公司也率先創新提供次級市場給信用條件較差的人機會去買房子。許多大型商業銀行(美國銀行、花旗、富國銀行)，存放款銀行(華盛頓互惠銀行、Indy Mac)，一些投資銀行(雷曼兄弟、貝爾斯登)追隨他的領導。

政府贊助的企業GSE扮演一個關鍵的角色提供約定俗成主要的房貸市場隱含的保證，至於次級市場和更大的房
貸證券化市場的業務因為GSE的缺席，鼓勵了私人企業聚焦在這些成長較高風險的部分，自從2003後沒有政府的保證代表著更高的受益。
這裡政府保證不會違約的金融工程產品激增，使用複雜的模式和CDO(Collateralized Debt Obligations)抵押債務證券重新建構高風險的房貸成為三個A等級的證券資產。 

總體而言，金融危機造成的原因來自於資產的泡沫，政府失職去控制泡沫以及觀察家認為饗宴會一直持續下去，2007-10危機的核心，來自於美國房地產價格的泡沫，但是政府和銀行之間的連結和泡沫本身仍沒有被充分了解，作者的目標是提供一個簡單的說明關於房貸證券化的產業，政府、企業和創新行動者在建構這個市場的角色，以及2002-7金融商品的演進視為一個務實的解決方案讓銷售者去說服買方的反對問題。
諷刺的是美國政府，1960年代創新MBS這工具去刺激房子擁有人，政府不需要直接涉入房貸產業，現在卻完全擁有或控制超過一半的房貸債債權。
    
本章節的六個部分，
首先提供一個整體了解金融的循環，相關的政府、企業和金融商品的成長，然後思考房貸證券化的個案，
接著作者證實1960年代政府如何創造這個市場，繼續探討從1970到1993年市場的建構，然後，檢視這產業1993-2007的改變和如何造成危機
最後思考危機的展現和簡單地評價不同的論述關於政府的角色
結論部分，更廣泛地討論政府、金融危機、金融工具和規範的問題。

Governments and banks in the CONSTRUCTION OF FINANCIAL MARKETS政府和銀行建構的金融市場

From our perspective, the best way to study the linkages between financial markets, gov­ernments, financial firms, and financial products is to realize that they form a field. By this, we mean that actors in governments and firms take one another into account in their actions. The structure of those relationships has a history. Such fields come into existence, remain robust for some period of time, and inevitably suffer crises (Fligstein 1996). Financial instruments have a history that is centered in this field. The creation of new instruments, their spread, use, and role in the expansion and sometimes contrac­tion in a particular market cannot be studied outside of these broader structures (for a similar argument see MacKenzie and Millo 2003; for evidence on the broader point see MacKenzie et al. 2008).

The creation of modern markets would not be possible without the intervention of governments (Fligstein 2001). Financial markets present an interesting special case of the role of government in markets. Modern banking dates back to the early modern period when governments needed to fund their activities and turned to private inves­tors for money (Carruthers 1999). Governments issued the first bonds and pioneered modern bookkeeping. Many of the financial crises of the past 500 years were caused by either governments overextending themselves by borrowing too much or allowing banks to create speculative markets for various asset classes (Reinhart and Rogoff 2009). Quinn (2010) shows that in the postwar era in the US, accountants, lawyers, and econo­mists working for the Federal government invented new forms of debt and pioneered the tactic of taking debts off their books. Governments also pioneered the set of strate­gies that we call “securitization" the tactic of selling off the rights to cash flow that is generated by some asset.

Governments have underpinned financial markets in a variety of ways for a variety of reasons. Most important is that governments have used financial markets to pursue pol­icy goals. Governments have recognized that economic growth is related to the availa­bility of credit. From a policy point of view, democratically elected governments have had to deal with the very real needs of farmers and industrialists to finance their busi­nesses, as well as consumers in their pursuit of money to finance their purchase of hous­ing, automobiles, education, and the latest gadgets. This has caused governments to generally favor the expansion of credit for themselves (to finance activities governments deemed legitimate) and for other parties.

The central activity of banks is that they operate to gather capital from people who do not have a need for it and lend it to people who do. This process, called “intermediation,” is at the basis of all of the things that banks traditionally have done. The people who give the money to banks are entitled to earn some interest and the bank takes a piece of the transaction for its profit. The lendee pays interest and fees in order to secure the loan. Governments have gotten involved in this process in a number of ways. In many parts of the world, governments own banks or maintain tight control over their banking sectors. Where they have allowed private sector banks, governments have produced regulations to insure that depositors are protected. They have created insurance for lendees to guar­antee that banks will not lose all of the money lent out. They have produced a wide vari­ety of regulation to govern how much banks can lend, how much they can borrow, and how they can invest their money. Governments have created central banks to coordinate banking activities and control the money supply.

There is a great deal of variation in the precise relationship between governments and the financial sector over time and space. Understanding this relationship requires his­torical and comparative analysis. So, in order to understand the nature of the role of government in a particular crisis (both as cause and as the actor who cleans up the mess), it is necessary to have an account that makes sense of how the sector came to be and the role that government had been playing in the sector up to and including the crisis. In the past 150 years, there has been a cyclical quality to these relationships. A given set of arrangements proves to be robust and the financial sector expands its activities. But, inevitably, that sector is disrupted by some kind of crisis. In the wake of the crisis, gov­ernments return to the sector and reorganize the remaining firms and implement a new set of rules. This requires governments to arrive at an account of “what the problem was” Remaining banks will try and preserve what they have and get the government to inter­vene on their side. This results in a rejiggering of the field, and sets up the dynamic for the next cycle (Reinhart and Rogoff 2009).

The role of professionals, particularly economists but also lawyers and accountants, in this process is complex but explicable. On the government side, one can expect that the people in charge of regulating the sector will have a background in the sector either based on practical experience or training in the field of economics or banking. On the firm side, the creation of new products and markets will be partially under the control of the firms, but will also be influenced by the government and what is going on in related markets. There is a current debate over the role of economists in creating financial mar­kets (e.g., MacKenzie et al. 2009). Many of the financial innovations of the past 50 years were not invented by economists with PhDs but instead people working within either the government or the industry.

People like Louis Ranieri, for example, who pioneered the use of mortgage-backed securities at Solomon Brothers during the late 1970s and early 1980s, came to the prob­lem from the perspective of a bond salesman (Lewis 1990; Ranieri 1996). Ranieri wanted to sell mortgage-backed securities, but faced several difficult problems in trying to attract buyers. He worked with government officials, but also with potential customers to overcome these problems. The idea of dividing bonds into tranches where lower tranches paid more interest but were riskier while higher-order tranches were safer but paid less interest was Ranieri’s way of getting customers to buy the amount of risk with which they felt comfortable. This central feature of all CDOs was thus not the creation of financial economists but employees of financial firms who were trying to overcome the objections of potential customers to buying bonds.

In the case of the recent financial crisis, all of these forces were at work (Aalbers 2008). The regulators of the banking sector had come to share the decision premises of the lead­ing banks. Johnson and Kwak (2009) and Smith (2009) call this a kind of “cognitive” capture. Regulators agreed with the bank industry that the proliferation of financial products had effectively spread the risks in the financial sector to actors who could absorb them. They saw the continuous expansion of the housing sector and the use of complex credit instruments to manage the sector as “efficient” because the latter pro­duced a large amount of credit for a large number of people and the market appeared to be growing and profitable. Of course, as the market began its collapse, the main players on the regulatory side consistently underestimated the severity of the downturn. In the aftermath of the market collapse, the same people remain in charge of reregulation and the reorganization of the sector. This is partially because of the continued control over the regulatory apparatus by economists and people associated with the industry. But it is not obvious who else could take over such regulation. In order to understand this cycle more thoroughly, it is useful to work through the case of mortgage securitization from its invention in the 1960s to its ultimate collapse in 2007.
作者的觀點最好的研究方式是了解金融市場、政府、企業和商品形成的場域，政府和企業的行動者在他們的行動中是互相支持的，這關係的結構有其歷史，某些時間這些場域仍保持活力，但不可避免地也遭受危機(Fligstein 1996) 。金融工具集中在這些場域有很長的歷史，它的創新、擴展、使用和角色，必須從這些場域來研究。
(Garruthers 1999)當政府需要資金去支持其活動，和建構特別的市場時則轉向私人投資者的錢來贊助，現代銀行回到早期配合的角色。

政府發行第一支債券和創新現代的簿記，過去500年間，許多金融危機的產生不是政府過度擴張借太多的錢就是允許銀行創造針對不同資產分級的特別市場。 (Reinhart and Rogoff 2009)
(Quinn 2010)指出戰後的美國，會計師、律師和經濟學家為聯邦政府發明新形式的債和創新的方法將債從簿記移除的手段，政府也創新一組我們稱之為證券化的策略，藉由銷售權利整合資產創造現金流。

政府也認同經濟的成長與信用的取得有關係，從政策的角度，民主的選舉中政府必須處理農人和產業人士的實質需求，能夠融資給他的商業需求，就像消費者追求金錢後，融資購買房子、車子、教育和最新的家用器具。造成政府一般而言偏愛自己信用的擴張在金融活動中，政府和其他的政黨都視為正當性的原因。

The transformation of the mortgage MARKET IN THE US, I969-2OIO
1969-2010 美國不動產市場的轉變

Housing is at the core of the American economy. Indeed, owning a house has been one of the linchpins of the American dream. The purchase of a house is the largest expense that any citizen ever makes. Public policy has recognized this as an admirable goal and governments of all political persuasions have worked to make ownership a reality since at least the 1920s and arguably since 1780 (Quinn 2010). The underlying shifts in the way in which mortgages were purchased are at the core of the mortgage meltdown from 2007-10. Our goal in this section is to describe the shift in this market from one where local S&L banks dominated under a set of rules provided by the government to one where the largest financial institutions used the mortgage market to feed their creation of investment products MBSs, CDO, and CDS. The Federal government has been a key party in this transformation. They pioneered the financial instruments that made this possible and they provided regulation and the GSE to help structure the mortgage market.

In 1965, the main players in the mortgage market were S&L banks. These banks had their origins in the nineteenth century when they were called “buildings and loans” or sometimes community banks. These banks would take deposits from local communi­ties and then make loans to people in those communities, which were used to buy or build houses. From 1935 until the late 1980s, about 60 percent of mortgage debt was held by S&L banks while commercial banks accounted for another 20 percent of the market (Fligstein and Goldstein 2010).

The government played a number of roles in creating the dominance of the S&L banks in the mortgage market. During the Depression, the government was concerned about home foreclosures and access to mortgages. They passed the National Housing Act of 1934, which created two government agencies, the Federal Housing Administration (FHA) and the Federal Savings and Loan Insurance Corporation (FSLIC). The FHA was authorized to regulate the rate of interest and the terms of mortgages, and provide insur­ance for doing so. These new lending practices increased the number of people who could afford a down payment on a house and monthly debt-service payments on a mort­gage, thereby also increasing the size of the market for single-family homes. The FSLIC was an institution that administered deposit insurance for S&L banks, which guaran­teed that depositors would get their money back if banks went bankrupt. Later, the FSLIC was merged into the Federal Deposit Insurance Corporation (FDIC). The gov­ernment regulators acted to stabilize the mortgage market in the aftermath of the Depression. Regulation and depository insurance allowed S&L companies to prosper in the postwar era building boom by being able to take in deposits that were guaranteed to account holders and make loans to people that could also be guaranteed by insurance provided by the government. Furthermore, favorable deposit rate regulations (Regulation Q) protected such companies from competition, which was justified by their role in promoting the American dream of home ownership.

The mortgage market circa 2005 bears little resemblance to this relatively simple world. Today, the market contains a number of distinct segments (Kendall 1996). Borrowers go to a lending company (frequently a bank, but not exclusively) which now is called an “originator” because it makes the initial loan. Unlike the S&L banks, these companies do not want to hold onto the mortgages they sell, but instead want to have them packaged into bonds, called MBSs, to be sold off to others. If they hold onto the mortgages, then their capital is now spent, they are unable to lend money again and their ability to generate fees goes away. So they turn around and sell the mortgages, thereby recapturing their capital, and move back into the market to lend.

The mortgages are then packaged together into something called a special purpose vehicle (SPV) by underwriters who are GSE, investment banks, or commercial banks. This vehicle turns the mortgages into a bond that pays a fixed rate of return based on the interest rates being paid by the people who buy the houses. These bonds are then rated by bond rating agencies in terms of their risk involved, and sold to various classes of investors. These SPVs divide up the mortgages into what are called “tranches.” Here, the mortgages are separately rated by bond agencies in terms of their riskiness. In this way, investors can buy riskier bonds that pay a higher rate of return or less risky bonds that pay a lower rate of return. The SPVs are managed by firms called servicers, who collect the monthly mortgage payments from the people who actually own the mortgage and disburse them to the bondholder. MBSs have subsequently been repackaged into so- called MBS CDOs. Here, buyers could purchase tranches of financial instruments that were based on a set of MBSs. But both MBSs and MBS CDOs are ultimately based on the cash flow coming from mortgage payments (Tett 2008).

Our imagery is one where circa 1975 mortgages were highly geographically dispersed in their holdings and held locally by S&L and commercial banks. Now, after they are issued, they migrate to a few square miles of Manhattan where, in the offices of the major banks and GSE, they are packaged into SPVs. They then are re-dispersed to investors all over the world (although they are serviced from a few locations). Investors are a hetero­geneous group. The largest investors in these securities are the GSE who held onto lots of MBSs. But MBSs are held by commercial banks, investment banks, S&L, mutual funds, and private investors here and around the world (Fligstein and Goldstein 2010). The interesting question is: How did we move from a world where the local buyer went to their local bank to get a loan to one where most of the mortgages in the US are now packaged into MBSs and CDOs and sold into a broad national and international market?

It will surprise most readers that the origins of the MBS and the complex financial structure we just presented were not invented by the financial wizards of Wall Street, but instead were invented by the Federal government. It is probably even more surprising that this set of inventions dates back to the 1960s. Quinn (2008) shows that the idea to create mortgage-backed securities began during the administration of President Johnson. The Johnson Administration was worrying about two issues: how to expand house ownership and how to do it in a way that would not increase the Federal budget deficit. The Democratic Congress and President Johnson wanted to rapidly increase the housing stock as part of its “Great Society” programs. They had three goals: to increase the housing stock for the baby boom generation, to increase the rate of home ownership, and to help lower-income people to afford housing. Quinn (2008) shows that the Johnson Administration did not think the fragmented S&L industry was in the position to provide enough credit to rapidly expand the housing market. But, Federal officials were also worried about the size of the budget deficit. Because of the Vietnam War and the Great Society expansion of Medicaid, Medicare, and other social benefits, the gov­ernment was running large and persistent debts. An expensive housing program where the government provided funds for mortgages would add to the deficit, because the gov­ernment would have to borrow money for the mortgages and hold those mortgages for 30 years.

If the government was going to stimulate the housing market, the Johnson Administration would need to do it in such a way as to not add to the Federal deficit. This caused them to reorganize the Federal National Mortgage Association (now called Fannie Mae) as a quasi-private organization, called a GSE, to lend money and hold mortgages. They also created another GSE, the Federal Home Loan Mortgage Corporation (now called Freddie Mac) to compete with Fannie Mae, and a government agency to insure those mortgages against risk of default Government National Mortgage Association (now called Ginnie Mae). The idea of the GSE was that the loan guarantees they provided would be backed ultimately by the Federal government.

But taking these mortgage granting entities private was not the only innovation of the Johnson Administration. The government also pioneered the creation of mortgage- backed securities (Sellon and VanNahmen 1988). The government, even in the GSE, did not want to be the ultimate holder of the mortgages it helped to sell. In order to do this, it needed to find a buyer for those mortgages. It did so by offering and guaranteeing the first modern MBSs, which were issued as bonds through Fannie Mae and Freddie Mac. These bonds could then be sold directly to investors and were sold by the GSE or through investment banks (Barmat 1990). The first mortgage-backed security was issued on April 24, 1970, by Ginnie Mae (The Wall Street journal 1970).

The private MBS market barely grew in the 1970s. There were several issues. Potential buyers of mortgage bonds were skeptical of buying mortgage-backed securities because of prepayment risk. The problem was that if you bought such a bond, people might pre­pay the mortgage before the end of the mortgage term and bondholders would get their money back before they made much of a profit. This was made worse by the fact that mortgage holders were more likely to refinance houses when interest rates were falling, thus leaving bondholders with money to invest at interest rates lower than the original mortgages (Kendall 1996).

This problem was ultimately solved through joint cooperation between the GSE and investment banks. They created the system of “tranching,” described above, in order that investors could decide which level of prepayment risk they wanted (Brendsel 1996). But there were also legal and regulatory issues involved in the packaging of bonds (Quinn 2008; Ranieri 1996). The most important was the problem of turning a mortgage into a security. The issue of a loan originator selling the mortgage into a pool of mortgages required changing the tax laws. The Tax Reform Act of 1986 cleared the way for the expansion of the MBS market. Investment banks and government officials worked together to solve these problems.

The demise of the S&L banks was an unexpected collapse that hastened the growth of the MBS market (Barth 2004). The general economic crisis of the 1970-80s produced very high interest rates. S&L banks relied on individual deposits for most of their funds. The regulation known as Regulation Q fixed the rate that S&L banks could pay on these deposits. Savers began to flee those accounts and the S&L industry faced the crisis that they could not raise enough money to make new loans. Moreover, they were holding onto a large number of mortgages that were priced at very low interest rates. Congress responded by passing the Garn-St. Germain Act. They repealed Regulation Q and allowed the banks to pay whatever interest rate they chose on deposits. They also dereg­ulated the asset side, allowing all banks to invest in a wider and riskier array of assets while still guaranteeing very large deposits. This meant the effective end of segmented banking.

The banks responded in several ways. First, S&Ls increasingly abandoned their his­toric role as mortgage intermediaries. They began to sell their mortgage holdings at a great loss in order to raise capital. These mortgages were repackaged into MBSs, prima­rily by Solomon Brothers (Lewis 1990). S&Ls also began to pay high interest on rates on government-guaranteed bank accounts. Many S&Ls then made very risky investments in commercial real estate, which helped create a commercial real estate bubble. This caused their ultimate demise (Barth 2004). S&L banks failed and the government ended up having to take them over and spend $160 billion on a bailout.

As the S&Ls left the mortgage finance sector, the Federal government took up the slack as the provider of mortgage credit. In 1980, the GSE had only packaged about $200 billion of mortgages debt into MBSs. By 1990, 50 percent outstanding mortgage debt was in GSE pools and another 10 percent was being held by the GSE. The GSE were directly involved in 60 percent of US mortgages, and only 15 percent were held by S&Ls (Fligstein and Goldstein 2010).

Despite the central role of the government as the main guarantor of mortgage risk, the overall structure of mortgage finance markets was quite fragmented both vertically and horizontally during the early 1990s (Davis and Mizruchi 1999; Jacobides 2005). Around the GSEs were arrayed a large number of relatively small originators and mort­gage servicers who provided the inputs and serviced the outputs of the agency-backed MBSs (see Fligstein and Goldstein 2010 for a more detailed discussion of concentration in mortgage finance markets).

But this interregnum of government centrality during the 1990s proved brief. Over the course of the decade the state and the banks worked to grow the MBS market and re- embed mortgage finance in the private sector. The transformation of the mortgage finance industry during the late 1990s and 2000s involved several closely interrelated shifts: the reorientation away from prime toward nonconventional mortgages and the associated shift in market share from the GSEs to the private banks, the development of new strategies among those banks for vertically integrating and mass-producing mort­gage debt products, the increasing consolidation of the market around a small set of dominant firms, and the proliferation of more complex financial instruments that trans­formed risky mortgages into AAA securities and made them more palatable to inves­tors. The government and the GSE encouraged banks of all kinds to enter into the market as part of their policy drive to increase home ownership. They also responded to the desires of all kinds of banks to be free of regulation and enter whichever segments of the market they chose. It is to the story of the past 20 years that we now turn.
房屋住宅是美國經濟的核心，事實上、擁有一個房子是所謂美國夢的其中之一的關鍵，可溯及1780年、最少也是從1920年開始，公共政策已經認同這是一個渴望達成房子擁有權成為事實的目標，政府政治上的信仰。
然而，來自2007-10抵押貸款系統崩潰的核心因素，是房子購買的方式根本的改變。
被地區性的S&L銀行所支配，憑藉著政府提供的規則改變，到最大型的金融機構使用房貸市場包裝提供投資商品的原料：MBS、CDO、CDS。
聯邦政府是造成這個轉變的主要機構，政府創新這種金融工具以及提供規範和GSE幫助建構了這房貸市場。

從1935到1980年晚期，大約60%的房貸業務是S&L銀行所承做，另外20%是商業銀行負責的原因，政府的角色讓S&L在房貸市場創造了支配性。
大蕭條期間，政府擔心房子取消抵押贖回權，而擁有了房貸本身，1934年通過了國家房屋法案，創造了兩個政府的代理人，聯邦住房管理局 (FHA)和聯邦儲蓄貸款保險公司(FSLIC) 。

在大蕭條期間，政府規範了穩定房貸市場的行動，讓管理局和存款保險機構允許S&L銀行能夠使用存款和借款給人們，都是在政府提供的保險保證之下，Q管制法案下利率的控管，也保護這些公司不需受到市場競爭，S&L被認定為幫助提升美國夢的角色。

The rise of the industrial model of the MBS MARKET, 1993-2007

MBS產業模式的崛起 1993-2007

Until 2003 most MBSs were sponsored by the GSE. The GSE relied on either the com­mercial or investment banks to put these packages together by originating or acquiring the mortgages, underwriting the MBS, and helping sell them to investors. Indeed, the

GSE worked to bring more and more financial firms into the MBS business. Those who did this included Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley, and Goldman Sachs. Of course, commercial banks and bank holding companies like Bank of America, Wells Fargo, Citibank, and Countrywide Financial were also deeply involved in the selling and packing of mortgages and MBS.

At the same time (1993-2007) as they became more involved in the securitization process, the largest banks became more and more integrated in the chain of production from the origination of mortgages to their ultimate sale as MBSs. Banks began in the 1990s to view their business as not based on long-term relationships to customers who would borrow and pay off their debts, but instead as fee based. This meant that banks were no longer interested in making loans to customers and holding the loans but instead were more interested in generating fees from various kinds of economic transac­tions. This was a response to the downturn in their core businesses of lending to long­time customers (James and Houston 1996). DeYoung and Rice (2003) document these changes across the population of commercial banks. They show that income from fee- related activities increases from 24 percent in 1980 to 31 percent in 1990, to 35 percent in 1995, and 48 percent in 2003. This shows that commercial banks were moving away from loans as the main source of revenue by diversifying their income streams well before the repeal of the Glass-Steagall Act. The largest sources of this fee generation in 2003 were (in order of importance) securitization, servicing mortgage and credit card loans, and investment banking (DeYoung and Rice 2003: 42).

Mortgage finance corresponded perfectly with a fee-based orientation. Financial firms realized they could collect fees from selling mortgages, from packaging them into MBSs, from selling MBSs, and from holding onto MBSs where they could earn profits using borrowed money (Currie 2007; DeYoung and Rice 2003; Levine 2007). The increased attention to fee revenue from securitization and mortgage servicing was accompanied by a huge growth in their portfolios of real estate assets. DeYoung and Rice show that banks did not just shift toward a fee generating strategy, but also shifted the focus of their investments. Instead of directly loaning money to customers, banks would either sell mortgages or package them into MBSs. They would then borrow money to hold onto a portion of the MBS. Commercial banks’ real estate loans repre­sented 32 percent of assets in 1986, increasing to 54 percent of assets in 2003. Why did this happen? They did this because holding onto the MBS was where the money was made. Mortgage Servicing News (2005) estimated that mortgage origination accounted for 10 percent of the profit on a real estate loan, while holding the MBS accounted for 70 percent, and servicing the loan accounted for 20 percent. By 1999, Bank of America, Citibank, Wells Fargo, and J. P. Morgan Chase, the largest commercial banks, all had shifted their businesses substantially from a customer-based model to a fee-based model where the end point was for customers’ loans to disappear into MBS.

This new integrated fee-based approach amounted to an “industrial” model for the mortgage business. The original pioneer in producing this conception of mortgage finance was not a bank, but Countrywide Financial. Countrywide Financial was founded in 1969 by David Loeb and Angelo Mozilo. During the 1970s, the company almost went bankrupt as it tried to expand its mortgage business across the US during the bad economic times of high interest rates and high inflation. But during the 1980s, the firm invested heavily in computer technology in all phases of its business. In the 1980s, the company expanded dramatically across the country began entering all of the activities of the mortgage industry. By the mid-1990s, it had entered into every segment of the mortgage industry. It purchased, securitized, and serviced mortgages. It operated to deal mortgage-backed securities and other financial products and also invested heavily in mortgage loans and home equity lines. During the mid-1990s, the company began to enter the subprime mortgage market and was a leader in that market for the next ten years. In 2006 Countrywide financed 20 percent of all mortgages in the United States, at a value of about 3.5 percent of United States GDP (gross domestic product), a propor­tion greater than any other single mortgage lender. Its rapid growth and expansion made it one of the most visible and profitable corporations of the past 20 years. Between 1982 and 2003, Countrywide delivered investors a 23,000.0 percent return (Fligstein and Goldstein 2010). Countrywide’s success became the model for a large number of banks as they expanded their MBS businesses, as well other mortgage finance firms like GMAC and GE Capital.

The vertical integration of MBS production was spurred on by the desire of firms to control the mortgages from the point of origination to their ultimate sale. Anthony Tufariello (2006), Head of the Securitized Products Group, in a press release distributed when Morgan Stanley bought Saxon Capital, suggested that “The addition of Saxon to Morgan Stanley’s global mortgage franchise will help us to capture the full economic value inherent in this business. This acquisition facilitates our goal of achieving vertical integration in the residential mortgage business, with ownership and control of the entire value chain, from origination to capital markets execution to active risk manage­ment” (Morgan Stanley 2006).

Dow Kim, President of Merrill Lynch’s Global Markets Investment Banking group made the very same point in announcing the acquisition of First Franklin, one of the largest subprime originators in 2006: “This transaction accelerates our vertical integra­tion in mortgages, complementing the other three acquisitions we have made in this area and enhancing our ability to drive growth and returns” (Merrill Lynch 2006).

Thus another significant consequence of the industrial model was that the mort­gage sector became a focal point for diverse types of financial institutions to enter new businesses. Countrywide Financial (a mortgage broker) and Washington Mutual Bank (a S&L bank) both rapidly entered into all parts of the mortgage business dur­ing the 1990s. On the investment bank side, Bear Stearns, an investment bank, entered the mortgage origination business by setting up lender and servicer EMC in the early 1990s. Lehman Brothers, another investment bank, bought originators in 1999, 2003, 2005, and 2006 (Currie 2007). Both GMAC and GE Capital moved after 2004 into the subprime mortgage origination industry and the underwriting of MBS (Inside Mortgage Finance Publications 2009). During the subprime mortgage boom, Morgan Stanley, Merrill Lynch, and Deutsche Bank all bought mortgage originators (Levine 2007).

One of the main propellers of this convergence and integration after 2000 was the repeal of the Glass-Steagall Act (Barth et al. 2000; Hendrickson 2001). The Glass- Steagall Act was enacted in 1935 during the Depression. One of its main rules was to force banks to choose whether or not they wanted to be investment banks or commer­cial banks. During the past 25 years, policymakers and bankers have worked to have this barrier broken down, largely because of the MBS business. As that business became larger, commercial banks wanted to be able to sell loans (be originators), package loans (be conduits), and hold onto loans (be investors). As banks like Bank of America and Citibank saw that fees for putting together these packages ended up with investment banks, they lobbied to have the barrier removed. They got their wish. The Glass-Steagall Act was rescinded in 1999 and banks were allowed to be in any business they chose.

At the same time that firms were diversifying both horizontally and vertically into multiple market segments, each of these individual markets was also becoming much more concentrated around a core set of dominant firms. The market share of the top five originators stood at 16.3 percent in 1996, a remarkably unconcentrated figure. But by 2007, the top five originators accounted for 42 percent of a much larger market. In 1990, the 25 largest lenders accounted for less than 30 percent of the mortgage market. This rose steadily during the 1990s and, by 2007, the top 25 originators controlled 90 percent of the market. Similarly, if one looks at the top ten conduit issuers in 2007, the total is 71 percent. So, there was not just a rapid growth in the size of these markets, but also a rapid concentration of activities in fewer and more nationally oriented banks (Fligstein and Goldstein 2010). The evolution of regulations and firm strategies meant that by the early 2000s the formerly fragmented mortgage finance markets had been combined into a single market with players vying for opportunities in all parts of the market.
直到2003年大部分的MBS都來自GSE的贊助，GSE依靠商業銀行和投資銀行將取得的房貸包裝在一起，承做MBS房貸抵押證券，幫助銷售給投資人。
GSE也帶來越來越多的金融企業從事MBS的商業模式，包含了雷曼兄弟、貝爾斯登、美林、摩根、高盛，商業銀行的BOA 、富國銀行、美國國家金融公司，也深深地涉入MBS的包裝與銷售

1990年代開始，銀行檢視他們的商業模式，不是與客戶長期借和貸的關係，取而代之是手續費的收入，2003年手續費最大的來源是資產證券化，服務於房貸和車子信用貸款和投資銀行。

Reorientation toward subprime MORTGAGES

By 2003, investors of all kinds—commercial banks, investment banks, hedge funds, insurance companies, and other private investors—had figured out how to use leverage by borrowing money cheaply to buy MBSs. Investors who actually had cash, like pensions funds, insurance companies, and governments and banks around the world were seeking out safe investments that paid more than 1-2 percent, like government bonds. American mortgages seemed like a good bet. The underlying assets of mortgages were houses and the MBSs contained mortgages from all over the country, thereby appearing to be diver­sified geographically. American housing prices had risen steadily for as long as anyone could remember. Finally, MBS were rated and it was possible to secure “AAA” rated bonds. This made American mortgages seem like low-risk, high-yield investments.

Two factors spurred the pronounced shift in the composition of the mortgage sector toward riskier nonconventional mortgages after 2003 (Goldstein and Fligstein 2010).

First was the fact that the supply of conventional mortgages peaked in 2003 and began a rapid decline hereafter. About $2.6 trillion worth of conventional or prime mortgages were bought in 2003, which were mostly refinancings driven by extremely low interest rates. But in 2004 interest rates increased slightly and prime mortgage origination dropped to $1.35 trillion, a decline of almost 50 percent. So, while those who had money to buy MBS were looking for product, the saturation of the prime market meant that packagers of MBS lacked enough to sell. Also, banks and mortgage specialists had learned to profit from industrialized securitization and had built expanded organiza­tional structures predicated upon the input of more raw mortgages. This meant that there was a huge incentive to find new sources of mortgages.

Firms compensated by aggressively expanding the formerly small niche market for subprime loans and home equity loans. In 2004, for the first time, these loans exceeded the prime market. In the peak of the mortgage craze in 2006, fully 70 percent of all loans that were made were nonconforming mortgages of one form of another. This astound­ing change in the character of the mortgage market was noticed by regulators and Congress. But, the Federal Reserve chose to ignore what was going on. Alan Greenspan has famously testified before Congress that the reason he did nothing to stop this rapid growth in subprime mortgages is that he did not believe that banks would have made these loans if they thought they were too risky. He is also on record as saying that he clearly was mistaken on this point.

Government regulations also shaped the development of nonconventional markets in less direct ways. Most fundamental is the fact that the GSEs were barred from includ­ing subprime mortgages in their pools. This created a demarcated segment that the banks could have all to themselves. So while the shift toward nonconventional mort­gages was spurred primarily by the supply crisis in the prime market, nonconventional markets offered firms the opportunity to cut out the government as middleman, inte­grate entirely, and realize higher yields due to the lack of government guarantee against default.

Complex instruments

複雜的金融工具

The use of complex financial instruments was one of the key factors that allowed firms to expand nonconventional securitization because these technologies could be used to transform pools of even the riskiest mortgages into investment-grade securities. CDOs (re-securitizations of existing MBS securities) and CDSs (quasi-insurance against a defaulting MBS or CDO) were both modeling-intensive tools widely believed to guard against default risk by spreading it and minimizing its financial impact. CDO instru­ments thereby provided an infrastructure for firms to securitize and sell trillions of dol­lars of risky mortgages.

But the explosion of these instruments around nonconventional mortgage securitiza­tion was also, at root, a product of the structure of relations between firms and the state in the market. The fact that regulations barred the GSEs from issuing and guaranteeing subprime-backed MBS required an alternative means of making these products palata­ble to risk-averse investors. Sophisticated statistical models (and their devilish assump­tions) came to replace the government guarantee as a way of dealing with MBS defaults.

複雜金融工具的使用是允許企業擴張非常規證券化的主要原因，因為這些技術能夠完全改變即使是最高風險的房貸成為投資等級的證券。CDO、CDS兩者模型導向的工具，藉由分散擴展它和極小化它的金融衝擊後，廣泛地被相信可以保護免於違約的風險。
但是非常規房貸證券化的工具激增的根本，仍是在市場的國家和企業關係之間的結構下的產品

事實上GSE阻擋了監管，從發行和保證次級房貸，對投資者而言這些產品被認可到風險趨避需要一個可以替代選擇的工具，複雜的統計模式(和殘忍的假設)處理MBS的違約的方式，取代了政府的保證。

Assessing the state’s role in creating THE financial CRISIS

The preceding analysis suggests that the key developments in the mortgage finance field leading up to the subprime crisis resulted from the coevolution of state policies and firm strategies. So what of the state’s precise role? A comprehensive accounting of relevant regulatory (in)actions is beyond the scope of this chapter, but we present a few remarks on important aspects of the debate.

The subprime meltdown is often framed as an inevitable outgrowth of the Fed’s low interest rate policy. While low interest rates were a necessary condition for fueling the housing price bubble and heightening the attractiveness of high-yield MBSs, it was actually an increase in rates in 2004 that hastened the rapid growth of risky mortgage debt, as firms sought out new loan markets to compensate for the drop-off in refinance loans (Goldstein and Fligstein 2010). The main role of the Fed and other regulators was to refuse to halt the banks’ reckless strategies in accordance with their belief in the effi­cient market hypothesis. Indeed the Office of Thrift Supervision, , the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Reserve all failed at key junctions to place any restraints on the banks’ expan­sion of subprime lending or their growing leverage.

Some commentators have argued that the state’s more activist interventions into the mortgage markets—particularly policies designed to extend credit to historically under­served communities—amounted to market distortions that drove lenders to increase credit to risky borrowers. In particular, the Community Reinvestment Act (CRA) is often cited by critics as a key governmental contributor to the risky subprime boom. The comprehensive report by the Financial Crisis Inquiry Commissionprsents a litany of evidence against this view (Financial Crisis Inquiry Commission, 2011: xxvii). Financial firms embraced these markets because they figured out that was where profits were highest, not because the government pressured them. The problem was not so much the state’s purposeful efforts to expand credit provision as it was its failure to place any limi­tations on the banks’ reckless expansion of credit.

What has saved the financial sector is the government takeover of the GSE and the propping up of the rest of the banking system. The mortgage market is still one charac­terized by the industrial organization of banks but these banks are now more heavily concentrated and control more and more of the market. The government is the main player who is now providing loans into the mortgage market. By virtue of its ownership of Freddie Mac and Fannie Mae, and its takeover of assets of failed banks, the govern­ment now owns half of the mortgages in the US. Ironically, in the 1960s, the government set up the GSE and created the MBSs in order that they could increase home ownership without direct government ownership of mortgages. But their 40-year efforts to create a large private market for mortgages rose spectacularly and failed. Today, they own the largest share of the market.

Conclusion

結論

Our chapter provides a coherent argument about what really caused the mortgage melt­down of 2007-10 in the US. In essence, the bubble was being driven by financial institu­tions who wanted to be vertically integrated and mass-produce MBSs and CDOs in order to make money off of all phases of the securitization process. The “industrial” model was enormously profitable as long as house prices went up and the size of the market grew. The low interest rates of the early 2000s fueled this model as they provided incentive to increase the supply of mortgages that were originated. The main source for those mortgages from 2001 until 2004 was the conventional mortgage market where nearly everyone who could have refinanced a mortgage did so. The demand for MBSs from investors could not be satisfied by the prime mortgage market. Beginning in 2004, all of the main players in the industry shifted their attention to subprime mortgages. They discovered that they could package these mortgages and sell their higher returns to customers, but also hold onto to these higher returns by buying them into their own portfolio. In essence, the financial community who wanted to buy and hold MBSs and CDOs drove the subprime, where there were even higher profits to be had.

The financial institutions evolved from the early 1990s until 2007 in such a way as made them able to innovate and capture more and more profit-making activity. They grew large, concentrated, integrated, and profitable. The fall was caused by the fact that at the end of the day, the underlying assets in the bonds were not really AAA. Mortgagees started to default as they could no longer make payments or keep up with adjustable mortgages. Even once the housing market started to turn down and defaults rose, large banks continued buying up subprime lenders in a bid to keep the raw materials flowing through the pipeline. The same industrial strategy which had allowed the banks to grow the subprime bubble would also prove to be a source of its unraveling.

We note that this account diverges from much of the sociological literature on finan­cial markets in general, and from extant explanations of the MBS meltdown in particu­lar. The “financialization” of the American economy made all of this possible and, indeed, made it the core profit center of the US economy (Davis 2009; Krippner 2005). But the “financialization” perspective argues that finance was no longer dominated by a core set of firms, but instead by the market (Davis 2009). As such, this point of view misses the profound ways in which mortgage finance transformed into a vertically inte­grated “industrial” model that began in the 1990s and spread to all of the major players

by 2006. The “actor-network/performativity” model rightly points out that the rise of the MBS and CDO boom occurred through the proliferation of ever more complex securitization technologies, particularly CDO. But, this perspective errs in supposing that the explanatory salience of CDOs derives the features of the instruments themselves rather than from their role in the broader industrialization of mortgage finance.

The results carry several larger implications that extend beyond the mortgage melt­down. First, most sociological work on finance has not placed firms and the government at the center. Scholars have focused instead either on macroscopic historical shifts whereby financial markets supplant firms (Davis 2009), or on microlevel structures and the trading instruments (MacKenzie 2009). If we are right, large firms increasingly came to dominate mortgage finance in the years leading up to the meltdown. They did so with the help and approval of government regulators and the GSE, which were all interested in increasing the availability of credit and home ownership. The findings also suggest that the key developments in the industry are wholly unapparent without focusing on firms, GSE, and the government as the central actors.

There is still much work left to be done. We speculate that financial institutions that were trying to sell subprime mortgages systematically sought out buyers in places where prices were rising and thereby created the bubbles in those places. The role of the gov­ernment regulators in this process has barely been researched. We know of some key events and actors, but we know less about what they knew and when they knew it. There were warning signs that the industry was in trouble as early as 2005, but they were ignored. It is easy to conclude that this was a case of regulatory capture of the govern­ment by the financial sector. But the story is more complex: the regulators shared the assumptions of the sector and therefore were not just undermined, but were willing and helpful participants.

The whole story of the evolution of mortgage finance has barely been fleshed out here. Our understanding of the way in which the mortgage market became an integrated pipeline is important but not complete. It needs to be supplemented with more detailed analysis of which financial institutions were doing what and when. We have argued that the separate markets circa 1990 became integrated by 2001. Who were the entrepreneurs who did this? How exactly did they all come to coalesce around this common model? There is much to study in its own right.

Finally, we know little about the precise role and behavior of consumers in the non- conventional mortgage bubble. We know some were poor people, others middle-class people priced out of local markets, and still others real estate speculators. They were also geographically centralized in a few places. The link between these people, those places, and the actions of the financial firms to find and grow those markets needs to be explored in more detail.

Economists and historians have been studying the Great Depression of the 1930s on and off for the past 80 years. This is because scholars were not satisfied with the conventional wisdoms of the moment as explanations of what happened. Our chap­ter has worked to provide an interpretation of how to make sense of the industry over time by focusing on the role of government and firms in innovating financial products and structuring the market. We hope it stimulates more efforts to apply all of the tools of economic sociology to understand the “great recession” of 2007-9.


2007-10美國發生抵押貸款系統崩潰的真正原因，本章提供一清楚的論述，本質上，這泡沫來自於金融機構想樣垂直整合和大量製造MBS、CDO，為了在證券化過程中的每個階段都能夠賺錢。
這工業化的模式享有巨大的利潤，只要房子價格持續上升以及市場規模繼續成長，當主要抵押房貸市場的MBS無法滿足投資人需求時，2004年開始，主要的玩家轉移注意到次級房貸市場，他們發現可以包裝成更高的收益賣給消費者，同時也可以讓自己的投資組合中取得更好的回報，本質上、金融社群中自己也購買和持有MBS和CDO造成次貸的泡沫。

從1990年代早期到2007年金融機構逐漸形成如此方式，能夠賺取更多利潤製造的活動，然而失敗的事實是，到了最後，在債券裡的根本資產不是AAA等級的。
當他們不再付的出錢或跟上可調整的抵押貸款時，承受抵押貸款者開始違約，大型銀行則繼續盡量收購次級貸款者，企圖保持製成管道的原料流暢，這樣的策略也允許銀行助長了次貸的泡沫，被證明是能清楚解釋的來源，作者發現這解釋和許多金融市場的社會學文獻分歧，特別是關於MBS的崩潰現有解釋。
美國經濟的金融化製造所有的可能，確實金融化製造美國經濟的核心利潤中心。(Davis 2009；Krippner2005)
但是金融化正確的論述，金融不再由一組核心企業所支配，取而代之的是市場。(Davis 2009)


作者提出這觀點缺凡深刻的思考，抵押貸款融資在1990年變成一個垂直整合的工業化模式，在2006年擴展到全部的參與者，這行動者網絡的模式，正好指出MBS和CDOs繁榮的崛起，經由更複雜的證券化技術，特別是CDO的快速增長，這個觀察的錯誤是假設CDOs的特點源自於工具本身的特色而不是來自於貸款金融更廣泛工業化的角色。
這討論帶出抵押貸款系統崩潰之後延伸ㄧ些更大的含意，首先，大部分在金融上社會學的工作，沒有放置企業和政府在中心，學者取代關注的不是宏觀的歷史轉變藉以金融市場代替企業(Davis2009) ，就是微觀程度的結構和交易工具。 (Mackenzie2009)

大型企業幾年來增加貸款融資的支配性，引導造成了系統完全崩潰，能夠如此，來自於政府監管、GSE的幫助和認可，全部都關心信用和房屋所有權的取得。
這個發現也間接說明 如果沒有聚焦討論公司、GSE、和政府為最重要的行動者，在工業化主要發展的原因是完全不明顯的。

作者提供解釋說明如何更清楚產業發展時，聚焦在政府和企業創新金融商品和建構市場的角色，希望啟發更多的努力去應用所有經濟的社會學工具去了解2007-9的大衰退金融海嘯。