The Transformation of the U.S. Mortgage Market, 1969-2011

The Transformation of the U.S. Mortgage Market, 1969-2011

Housing is at the core of the American economy. But it is more than that: own­ing a house is the linchpin of the American dream. From the point of view of our theory and its focus on meaning and identity, to make it in America, particularly in the postwar era, has meant to own a house. This goal was the existential bed­rock of the middle class. Indeed, it defined being a member of that class. Not surprisingly, public policy in the United States 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 (Quinn 2010). Helping people buy homes brought together both Democrats and Republicans because it resonated with the core values and meanings of the great American middle class (and those who wanted to join!).

This meant that since the 1920s, whenever home ownership was threatened by lack of supply of houses, too little access to mortgages, or mortgage terms that restricted too many people from buying homes, government policy makers in­novated new ways to make more home ownership possible. Private business was the principal beneficiary of this tendency of public policy to promote home ownership. Any scheme business constructed that worked toward that goal by making the cost of getting a mortgage lower and more widely available to larger parts of the population got the adoration of not just the state strategic action fields involved in housing but also the president and members of Congress in both political parties. The fields in the state and the private economy that made possible the purchasing of housing were animated by the fact that making this part of the American dream available to everyone who might want it was always considered a good thing.

Our goal is to tell the story of the changing nature of the housing strategic action field by placing that story into the same sequence of elements as our ren­dition of the Civil Rights movement. Toward that end, we begin by describing the structure of the housing strategic action field as it emerged from the Great Depression and stabilized after the Second World War. In this strategic action field, the dominant players were the local savings and loans banks that, with help from the various federal agencies that provided rules to structure the mortgage industry, created a stable strategic action field for housing mortgages that lasted until the mid-1980s. There were a number of important state strategic action fields that structured the mortgage field: the Federal Housing Administration (FHA), the Veterans Housing Administration, and the Federal Savings and Loan Insurance Corporation (FSLIC). These strategic action fields basically regulated the terms of mortgages and worked to stabilize the savings and loans banks. In doing so, they created a stable and profitable world for the savings and loans banks. As a result, house ownership rose in the United States from about 25 percent before the Depression to 63 percent in the early 1960s. The industry also contained a set of IGUs, mostly trade associations, that worked hand in hand with government officials to keep housing mostly private and profit in the hands of the banks and construction industry.

Then, we describe the changes that destabilized that regime during the 1970s and 1980s. This created a huge crisis in the strategic action field that took ten years to settle. The new settlement created a whole new set of players in the mortgage markets, both banks and government agencies, and a whole new way to buy and sell mortgages. The largest financial institutions that included mort­gage, commercial, and investment banks used the mortgage market to feed their creation of investment products such as mortgage-backed securities (MBSs), credit debt obligations (CDOs), and credit default swaps (CDSs). The federal government has been a key party to this transformation. They pioneered the financial instruments that made this possible and they provided regulation and government-sponsored enterprises (GSEs) to help structure this new strategic action field. It was this newly settled strategic action field that was at the core of the mortgage meltdown from 2007 to 2011. We end by discussing the causes of this meltdown and the impact of this episode on other strategic action fields.

This transformation of the mortgage industry strategic action field entirely reconstructed the identities of the incumbents and challengers. The savings and loan banks that dominated the field from the 1930s until the late 1980s became a bit player. The government, which in 1965 was mainly a regulator to the field, became a player in the market in a central way through its ownership and control of the GSEs. In the 1990s, a whole new kind of financial firm emerged, a verti­cally integrated bank that worked in all phases of the mortgage market from orig­ination to holding MBSs.

Countrywide Financial, led by Angelo Mozilo, was the firm that acted as the institutional entrepreneur that pioneered the new way of organizing mortgages in the private sector. Its tactics were soon copied by the largest commercial, in­vestment, and savings and loan banks. By 2005, Citibank, Bank of America, Washington Mutual Savings Bank, Wachovia, Merrill Lynch, Bear Stearns, and Lehman Brothers all had operations that spanned the entire market. This trans­formation changed the nature of the field, the rules governing the field, and the role of the government in the field. The way in which these changes evolved fol­lowed the principles laid out in our earlier chapters and had a similar structure to our story about the civil rights movement. An established field experienced a set of exogenous shocks. These shocks undermined the existing order. Just as in the civil rights story, the government played a role in destabilizing the field and, when the savings and loan banks began to fail, provided a new underpinning to the field. But because of the obsessive interest in furthering the American dream by having people own homes, the government was always interested in pro­moting investment by other financial entities, and it welcomed and indeed enticed the entry of financial firms of all varieties. To begin our story, it is useful to characterize the strategic action field circa 1965 and the strategic action field circa 2005.

The Dominant Strategic Action Fields of the Mortgage Market, 1934-1987

In 1965, the main players in the mortgage market were savings and loan banks. These banks had their origins in the nineteenth century, when they were called “buildings and loans” or sometimes “community banks” (Haveman and Rao 1997). These banks would take deposits from local communities and then make loans to people in those communities that were used to buy or build houses. They would hold on to those loans until they were paid off, either because people sold their homes or, more likely, because they held the loans for the entire term of the loan. A standard line about the industry was that bankers had the “3-6-3” rule. They would borrow money at 3 percent, loan it to homebuyers at 6 percent, and be on the golf course by 3 p.m. From 1935 until the mid-1980s, about 60 percent of mortgage debt was held by savings and loan banks while commercial banks, using the same model, accounted for another 20 percent of the market (Fligstein and Goldstein 2010). The movie Its a Wonderful Life portrays the trials of a small town savings and loan bank during the Depression. The model of lending represented in that movie was still dominant as late as 1985.

The government played a number of roles in the formation of this strategic ac­tion field. Indeed, without the government, home ownership as a mass phenom­enon would have been impossible. It constructed the field, and the strategic action fields of the government constituted the infrastructure of the field. The govern­ment set up and supported the privately run mortgage industry. This is a case in which it is the analyst s judgment call in deciding if the state s strategic action fields are outside of the field or are in fact acting as IGUs as part of the field. 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 FHA and the FSLIC. The FHA was authorized to regu­late the rate of interest and the terms of mortgages and provide insurance for doing so. The government laid down the conditions for the modern mortgage. It has a fixed interest rate and a fixed term of payment (usually thirty years), and it requires a down payment of 20 percent. This set of innovations put into place and regulated by the government strategic action fields formed what we now call the “prime” or “conventional mortgage market.” 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 savings and loan banks that guaranteed depositor s got their money back if banks went bankrupt. The guarantee on savings accounts meant that small savers were guar­anteed to get their money back in case of bankruptcy. This was paid for by cre­ating an insurance pool funded by savings and loans banks. The government regulators acted to stabilize the mortgage market in the aftermath of the Depres­sion. Regulation and depository insurance allowed savings and loan banks 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 mortgagees that could be guaranteed by insurance provided by the government. With the return of vet­erans after World War II, the housing market in the United States exploded and the savings and loan banks with the regulatory backing of the federal agencies grew rich and dominated the market. Later, the FSLIC was merged with the Fed­eral Deposit Insurance Corporation.

The mortgage market circa 2005 bears litde resemblance to this relatively simple world. Today, the market contains a number of distinct segments. Bor­rowers today go to a lending company (frequently a bank, but not exclusively) that now is called an “originator” because it makes the initial loan. Unlike the savings and loan banks, many of these companies do not want to hold on to the mortgages they sell but instead want to have them packaged into bonds, called “mortgage- backed securities,” to be sold off to others. If they hold on to 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 moving back into the market to lend. The mortgages are then gathered together into a financial package called a “special purpose ve­hicle” by underwriters who are GSEs, investment banks, or commercial banks.

But it is here that government plays a new role. The GSEs are both market makers and market regulators. As such, they are participants in the market but also act as IGUs. We will discuss why the Congress created these organizations and how they came to redefine and re-create the mortgage market in the wake of the collapse of the savings and loan banks in the 1980s. Their complex role in the market is the main way that the government remained directly involved in the mortgage market right up to the 2007 financial crisis. Again, because of the quasi-governmental status of the GSE, it is a judgment call as to whether or not the mortgage strategic action field was really a field of the state.

Hie special purpose 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. Bond rating agencies are one of the principal IGUs in the mortgage field. By certifying the riskiness of bonds, they allow bonds to be priced, sold, and bought. Theoretically, buyers of the bonds understand how risky they are by having a single measure of the overall riskiness of the underlying mortgages. Bond rating allowed many long-term financial investors such as pension funds and insurance companies to buy the bonds and hold them for long periods of time. They operated to legitimate MBSs as financial products, expanded the market, and, indeed, made it possible.

These special purpose vehicles divide up the mortgages into what are called “tranches,” and the bonds so divided are termed “collateral debt obligations.” 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 special purpose vehicles are managed by firms called “servicers” that collect the monthly mortgage payments from the people who actually own the mortgage and disburse them to the bondholder.

Financial firms decide in which of these segments they will do business. From the period 1993-2009, more and more firms decided to participate in multiple segments (Goldstein and Fligstein 2010). We describe the market that emerged as an “industrial model” in which the vertical integration of financial firms across market segments have them making money off of all of the stages of the various transactions. It is in capturing fees from these transactions that finan­cial firms maximize their ability to profit. By participating in many segments of the industry, they can profit from the selling and packaging of mortgages all along the process. Financial firms include the GSE, commercial banks, invest­ment banks, savings and loan banks, and specialists such as GMAC Inc. and GE Capital.

Our imagery is one in which, circa 1975, the strategic action field for mort­gages was dominated by local savings and loan and commercial banks that took deposits from their communities, knew the people they loaned money to, and held on to the mortgages over the life of the mortgage. This meant that the busi­ness was geographically decentralized in all ways. The strategic action field that collapsed during 2007-2009 displayed a very different pattern. After mortgages were bought, they migrated to a few square miles of Manhattan, where in the offices of the major banks and GSEs they were packaged into special purpose vehicles. They then were redispersed to investors all over the world (although they were serviced from a few locations). The largest investors in these securities were the GSEs that held on to lots of MBSs. But MBSs are held by commercial banks, investment banks, savings and loan associations, mutual fund companies, and private investors here and around the world (Fligstein and Goldstein 2010). The interesting question is how did we move from the strategic action field in which local home buyers went to their local bank to get a loan to a strategic ac­tion field in which most of the mortgages in the United States are now packaged into MBSs and sold to a broad national and international market?

Changes That Destabilized the Mortgage Market, 1969-1987

As in our story about the civil rights movement, it was the connections between the mortgage market and related strategic action fields that provided the shocks that eventually undermined the savings and loan bank-dominated strategic ac­tion field. There were two main shocks to the savings and loan bank-dominated system of mortgages in the United States. First, the federal government in the 1960s began to worry that the savings and loan banks could not provide enough mortgages for the baby boom generation, and they began to create a set of new policies to expand mortgages and the financial instruments to fund them. The unintended consequence of their actions was to provide an alternative way to finance mortgages to that provided by the savings and loan banks.

Second, and even more important, was the bad economy of the 1970s. As we suggested in chapter 4, deep economic recessions are one of the external causes that undermine the order in a great many strategic action fields. We saw how the depression in agriculture undermined the political system that held African Americans in check. In the case of the savings and loan bank-dominated mort­gage strategic action field, the general economic crisis of a different era, this time the 1970s, produced high interest rates that undermined the basic business model of the savings and loan banks. Essentially, the banks found that they could no longer borrow money cheaply. They also found themselves with most of their investments earning very low rates of interest. In order to understand the shocks that undermined the savings and loan banks, it is useful to begin with the role of the federal government in creating the new model of mortgage finance.

It will surprise most readers that the origin of the MBSs and the complex financial structure we just presented was not the financial wizards of Wall Street, but instead 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 MBSs began during the administration of President Johnson. The Demo­cratic Congress and president 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 more generally, and to help lower income people afford housing. Why was housing so important for a Democratic administration and a Democratic- controlled Congress? As we have already argued, home ownership was the key to the American dream. The Democrats wanted to make sure that middle-class Americans were helped by government to attain that dream. Quinn (2008) shows that the Johnson administration did not think the fragmented savings and loan industry was in the position to provide enough credit to rapidly expand the housing market. For Johnson, the private sector was too fragmented and did not have enough capital to build and fund enough houses for all who would want them.

But federal officials did not want to directly replace the savings and loan banks as a supplier of mortgages and the ultimate holder of mortgages. 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 in which the government provided funds for mort­gages would add to that deficit, because the government would have to borrow money for the mortgages and hold those mortgages for thirty years. The mort­gages would count on the government balance sheets as liabilities, not assets, and thereby worsen the indebtedness of the state.

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, the Government National Mortgage Association (now called Ginnie Mae). The idea of the GSEs was that they would not be on the books of the fed­eral government. They would have to raise capital privately and fund loans by creating insurance and loan guarantees. The implication of the existence of the GSEs was the feeling in the industry that the money they were lent would be backed ultimately by the federal government. These GSEs could borrow money at lower rates and afford to sell cheaper mortgages to more people. Not surpris­ingly, they eventually came to dominate the mortgage market.

But making these mortgage-granting entities private was not the only innova­tion of the Johnson administration. The government also pioneered the creation of MBSs, thereby making it the collective institutional entrepreneur who invented an entirely new concept of the mortgage strategic action field (Sellon and VanNahmen 1988). The government, even in the GSEs, 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. MBSs were a set of mortgages that were packaged together into a bond created by the GSE. These bonds could then be sold directly to inves­tors by the GSE or through investment banks (Barmat 1990). The GSE would offer tacit guarantees that the bonds would be paid back. Because of their quasi- governmental status, GSEs could borrow money more cheaply to finance mort­gages and then turn around and sell those mortgages as bonds. The first MBS was issued on April 24,1969 by Ginnie Mae (Wall Street Journal 1969).

We note that the GSEs operated as a kind of internal governance structure for the industry. They interacted with government regulators at the Federal Reserve, the Federal Deposit Insurance Corporation, and the FHA. They produced rules for mortgage qualifications that became the standard for the industry. So, for ex­ample, the rules that conventional mortgages required a 20 percent down pay­ment and were capped at an amount set by the GSE provided the basic structure to the mortgage market. The GSEs operated to expand the mortgage market and held the market together in times of crisis. They cooperated with mortgage origi­nators, wholesalers, commercial banks, investment banks, and servicers to pro­mote the new market that emerged in the wake of the collapse of the savings and loan banks. Their actions affected every aspect of housing and mortgages.

The market for MBSs barely grew in the 1970s even with government guaran­tees. There were several issues. The savings and loan industry and commercial banks continued to have control over the bulk of the mortgage market where they took deposits, lent money, and held on to mortgages. But potential buyers of mortgage bonds were skeptical of buying MBSs because of prepayment risk. Almost all mortgages allow mortgagees to pay back the entire mortgage when­ever they like with no penalties. This meant that bondholders could get their money back before they made much of a profit. This prospect 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 GSEs and the investment banks. In particular, Lewis Ranieri, who worked for the investment bank Salomon Brothers, acted as an institutional entrepreneur who played a key role in solving these problems (Lewis 1990; Ranieri 1996). Together, they created the system of “tranching” described above so investors could decide which level of risk of prepayment 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 to the expansion of the MBS market. Investment banks and government officials worked together to solve these problems.

By the mid-1980s, the infrastructure to use MBSs as CDOs was in place. The legal problems were solved, and there existed powerful firms that were ready to make the market and IGUs to govern the field. But the mortgage securitization approach to funding mortgages still faced competition from the more traditional savings and loan-dominated strategic action field. This was a case in which we can see that the government was not a unified actor. Some parts of the govern­ment continued to support the savings and loan- dominated strategic action field by creating the regulatory conditions that helped those banks. The U.S. De­partment of Housing and Urban Development and the Federal Deposit Insur­ance Corporation continued to support the savings and loan banks as the main vehicle for finding mortgages. Not surprising, the Republicans generally favored the business interests of the savings and loans banks.

But at the same time, the government had laid the foundation for an alterna­tive strategic action field. It had created a set of challengers, the GSEs, that had strong supporters in the government who did not think the savings and loans banks were providing enough loans, particularly to low-income people. Given that these were created by Democrats controlling Congress and given that these supporters wanted to expand who could get a mortgage, it is not surprising that these supporters tended to be Democrats. In the late 1970s and the 1980s, the savings and loan industry realized that the GSEs presented a challenge to their control over the mortgage market. They and their friends in government worked hard to prevent the takeover of the mortgage market by the GSEs.

The struggle between incumbents and challengers was eventually resolved in the challengers’ favor when the incumbents’ model of the field fell apart. The demise of the savings and loan banks was not caused by the challenge of the GSE. Instead, it was caused by the tough economic times of the 1970s, which essentially made the business model of the savings and loan banks untenable. There was a prolonged period of slow economic growth and high inflation in this period that came to be called “stagflation.” One outcome of high inflation was very high interest rates for all forms of borrowing.

This struck savings and loan banks very hard. Remember that they relied for most of their funds on individual deposits. The interest rates paid on these de­posits were regulated by Regulation which fixed the rate that savings and loan banks could pay on these deposits at a relatively low level. It was the fixing of this rate that allowed savings and loans to make a profit. They borrowed money at, say, 3 percent, loaned it at, say, 6 percent, and made a profit. Since everyone had to offer low fixed interest rates to savers, there was little competition for funds. It also meant there was little competition for borrowers.

Savers began to flee those accounts as they found they could buy treasury bonds, certificates of deposit, money market funds, and other forms of financial instruments that paid higher interest rates. This meant that the savings and loan industry could not raise enough money to make new loans for housing. More­over, the banks were holding on to a large number of mortgages that were priced at very low interest rates. Congress responded by passing the Garn-St. Germain Act in 1982. This act repealed Regulation Q_and allowed the banks to pay what­ever interest rate they chose. It also allowed the banks to make riskier investments while still guaranteeing that people would be able to get back their deposits.

The savings and loan banks responded in several ways. First, they began to sell their mortgage holdings at a great loss in order to raise capital to invest in new things. These mortgages were repackaged into MBSs primarily by Salomon Brothers (Lewis 1990). They also began to pay higher interest on government- guaranteed bank accounts in order to attract deposits. They tried to raise their profits by making very risky investments, including many in commercial real estate, which helped create a commercial real estate bubble. These bad invest­ments caused their ultimate demise (Barth 2004). Savings and loan banks around the country began to fail. In the end, the federal government ended up having to take them over and spent $160 billion on a bailout beginning in 1989.

When the savings and loan banks collapsed, their dominance of the field of mortgage lending collapsed. But this did not eliminate the demand for mort­gages and the political appeal of home ownership. The question in the late 1980s was who was going to take over dominance of mortgage provision in the United States. Since mortgages were such an important part of government domestic policy and a basic staple of American politics, the Republican regimes of Ronald Reagan and George Bush (who generally favored private over public solutions to economic problems) were looking for a way to have the federal government take up the slack as the provider of mortgage credit. They were quite lucky that the GSEs already existed and that the GSEs had an alternative business model to that of the savings and loans. The GSEs borrowed their money right from the national capital markets on Wall Street and had extensive relationships with the investment banks that dominated those markets. As late as 1980, the GSEs had only issued $200 billion of mortgages, about 13 percent of the total that year. But the collapse of the savings and loan banks caused that share to rise to 63 percent by 1993. Over this same period, the share of the mortgage market controlled by the savings and loan banks, which was 58 percent in 1980, fell to 15 percent by 1993 (Fligstein and Goldstein 2010).

Settlement and the New Strategic Action Field

With the collapse of the savings and loan banks, the mortgage market was quite fragmented. Indeed, if the GSEs had not intervened so quickly and effectively, it would have been impossible to obtain mortgages in America from 1985 until the mid-1990s. Because of the huge role that the GSEs were playing in the market, their tactics and understandings were the main sources of the restructuring of the field. In the wake of the collapse of the savings and loan banks and their busi­ness model of “lend and hold,” the possibility for a whole new set of players with an entirely new business model emerged. But while the GSEs acted first to struc­ture the mortgage market in the wake of the savings and loan banks’ collapse, the model that eventually emerged in that market was one that contained both the GSEs and privately held banks. The GSE idea that mortgages were to be funded through the creation of securities dominated the new market. The GSEs played a big part as actors in that market. But other banks followed what we will call an industrial model to enter and organize the mortgage businesses. Banks such as Countrywide Financial were participating in every segment of the business by the late 1990s. This new settlement persisted and intensified all through the financial crisis of2007-2011.

Remember that the GSEs were not mortgage originators but operated instead as mortgage aggregators. They would buy mortgages with money they borrowed from the financial markets. They would pay someone to help them package the mortgages into CD Os, and then they would sell the CD Os to banks and other in­stitutional investors. This created opportunities for other kinds of firms both to come into existence and to become part of the large field of mortgage provision.

We argue that this was the social movement phase of the mortgage market. Lots of firms emerged to take advantage of the tremendous number of opportu­nities to participate in the mortgage market. They saw this huge market, and at the center of it were the GSEs that appeared to offer a government guarantee to the possibility of making profit. Small firms began to come into existence that specialized in finding mortgages for customers. These firms sold off the mort­gages to either loan wholesalers or the GSEs directly. Mortgage wholesalers would package mortgages from a number of locations and then sell them to the GSEs. Then, the GSEs would engage investment bankers to help them package mortgages into MBSs and use those same banks to find customers to buy the securities. A whole new class of firms emerged that specialized in servicing loans by taking payments from individual owners and disbursing them to the holders of the bonds. Finally, the bond and stock ratings agencies discovered the new business of rating MBSs. Circa 1993, this market looked quite fragmented, and the players in each part of the market were specialists who tended to stay out of the other parts of the market (jacobides 2005). There was a kind of “gold rush” here whereby lots of firms rose up to position themselves to make money off of American MBSs.

At the core of this market were the GSEs, which acted as facilitators, funders, regulators, and guarantors of mortgages. By playing all of these parts, they guar­anteed that other firms could make money off of the transactions that they would make possible. At the beginning, the private firms in each part of this market were fragmented into smaller pieces, each organized around one of the now necessary parts of the mortgage-providing process. In the end, this model turned out to be transitional. It is useful to consider the rise of the “industrial model” in the mortgage strategic action field.

As the decade of the 1990s went on, the opportunity to make money off of mortgages began to attract banks of all sizes and specializations. Mortgage banks, such as Countrywide Financial, specialized in home loans, and mortgage whole­salers specialized in gathering loans together for sale to those who wanted to create MBSs. Commercial banks had always been involved in the mortgage mar­ket, but over the decade of the 1990s became intrigued by entering all phases of the business. Investment banks had historically not been involved in the mort­gage market, and it is their aggressive entry into this market that characterizes their dramatic growth during the 1990s.

What attracted all of these banks? The American mortgage market was a tril­lion dollar market. The repackaging of mortgages as securities attracted the invest­ment banks and anyone on Wall Street whose business it was to buy or sell financial instruments. This meant that banks that could find a place in the market could make large profits in many different ways. What they eventually realized was that all of these activities could be lucrative. As a result, over time, banks began to enter more and more of them. This creation of a new strategic action field for the mortgage market created a financial revolution among banks. It is at this moment that all kinds of the banks became more active in all financial markets related to mortgages. This revolution started with the expansion of securitization but quickly created more complex financial instruments to create new ways to invest and control risk. It is to the story of the past fifteen years that we now turn.

The Rise of the Industrial Model of the MBS Market, 1993-2007

There are several parts to our story. First, the GSEs were interested in expanding the size of the mortgage market and increasing the participation of private banks of all kinds in the market. After they more or less took the market over in the mid-1980s, they worked to attract the participation of commercial and invest­ments banks in the process of securitization. As the IGU of the market, they provided rules, guidelines, and implied guarantees that made doing mortgage business lucrative for all participants. Their “masters” in Congress and the federal government (both Republican and Democratic) all viewed their role in creating the possibility of more homeowners an important goal of social policy. Their ability to borrow money at lower interest rates allowed them to buy mortgages from originators, package them into MBSs, and sell them with implied guaran­tees back to financial entities such as commercial banks. The GSE remained at the core of the mortgage market through this entire period of growth.

But the industrial model of the industry whereby banks wanted to be in all phases of the business was something that the major banks from different indus­tries hit on from several directions. Commercial banks began in the 1990s to view their business not as based on long-term relationships to customers who would borrow and pay off their debts but instead as fee based (DeYoung and Rice 2004). This meant that commercial banks no longer were interested in making loans to customers and holding the loans but instead were 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. Commercial banks began to develop an “industrial” model for their mortgage business (DeYoung and Rice 2004). They realized they could collect fees from selling mortgages, from packaging them into MBSs, from selling MBSs, and from holding on to MBSs when they could earn profits using borrowed money to buy them. Since mortgages that had been turned into MBSs by the GSEs were rated as safe as government bonds, they had the additional advantage of being able to be counted as part of the banks core capital. This industrial model required the input of more and more mortgages in order to reap the benefits along the entire chain of production and to continue growth and profit. This vertically integrated industrial model was first perfected in the prime mortgage market. It worked spectacularly for financial institutions in the 1990s and the first part of the 2000s.

The pioneer in producing this industrial conception of the market was not a commercial bank but a bank that had specialized in mortgages. 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 United States amid 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 and began entering all of the activities of the mortgage industry.

By the mid-1990s, Countrywide Financial had entered into every segment of the mortgage industry. It originated, purchased, securitized, and serviced mort­gages. It operated to deal MBSs 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 U.S. 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 twenty years. Between 1982 and 2003, Countrywide delivered investors a 23,000 percent return on its stock price (Fligstein and Goldstein 2010). Countrywide became the model for a large number of banks and other financial entities such as GMAC and GE Capital. It should not be surprising that Countrywide s model began to be emulated by all of the other major banks in the mortgage strategic action field.

The market for mortgages in the United States increased from $458 billion in 1990 to nearly $4 trillion at its peak in 2003 (Fligstein and Goldstein 2010). Most of these mortgages were packaged into MBSs. Many of these MBSs were sponsored by the GSEs. The GSEs frequently relied on either the commercial or the investment banks to put these packages together and help sell them. This meant that the repackaging of mortgages into bonds became the largest fee gen­eration business for many banks. Those who did this included Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley, and Goldman Sachs. Of course, commercial banks and bank holding companies such as Bank of America, Wells Fargo, Citibank, and Countrywide Financial were also deeply involved in the selling and packing of mortgages and MBSs. All of these banks aggressively packaged and sold MBSs to insurance companies, pension funds, and banks around the world. They later held on to a large number of these securities, which they financed through short-term borrowing from financial markets.

One of the central features of financial deregulation in the past twenty-five years has been the breaking down of the Glass-Steagall Act. 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 period from 1980 until 1999, policy makers and bankers worked to have this barrier broken down. One reason for this was 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 on to loans (be investors). As banks such as 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. The big commercial banks and bank holding companies were then able to fully participate in every part of the market.

The second important change in the industry was more subtle. The new financial services firms, and in particular the commercial banks, began to see their industries as not about giving customers loans but about charging fees for services. DeYoung and Rice (2004) document these changes across the popu­lation of commercial banks. They show that these banks’ income from fee- related activities increased from 24 percent in 1980, to 31 percent in 1990, to 35 percent in 1995, to 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 2004: 42).

This increased attention to securitization and mortgage servicing was accom­panied by a huge increase in real estate loans in financial services firms’ loan port­folios. DeYoung and Rice show that banks did not just shift toward a fee-generating strategy but instead 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 on to the MBSs. 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 on to the MBSs was where the money was made. It has been 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 JPMorgan Chase, the largest commercial banks, had all shifted their businesses substantially from a customer-based model to a fee-based model in which the end point was for customers’ loans to disappear into MBSs. Not surprisingly, all four were among the leaders in businesses located in all parts of the mortgage market.

The deregulation of financial services did not just provide commercial banks with the opportunity to enter into new businesses. It allowed other financial firms to expand their activities as well. While the boundaries between financial industries were clearly eroding from the 1980s on, after 1999 with the repeal of Glass-Steagall, any financial firm could feel free to enter any financial industry. The real estate market was a potentially huge opportunity for all sorts of financial services firms. The potential to earn fees from originating mortgages, securi­tizing mortgages, selling mortgages, servicing mortgages, and making money off of MBSs was enormous. Countrywide Financial started out as a mortgage bro­ker and Washington Mutual Bank started as a savings and loan 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 Mortgage Corpora­tion in the early 1990s. Lehman Brothers, another investment bank, bought originators in 1999,2003,2005, and 2006. Both GMAC and GE Capital moved after 2004 into the subprime mortgage origination industry and the under­writing of MBSs (inside Mortgage Finance 2009). During the subprime mort­gage boom, Morgan Stanley, Merrill Lynch, and Deustche Bank all bought mortgage originators (Levine 2007).

Hie vertical integration of production was spurred on by the desire of banking entities to control the mortgages from the point of origination to their ultimate sale. Anthony Tufariello, head of the Securitized Products Group, in a press release distributed when Morgan Stanley bought Saxon Capital suggested, “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 Lynchs 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).

By the turn of the twenty-first century, the MBSs business was increasingly dominated by a smaller and smaller set of players. The largest commercial banks, mortgage banks, and investment banks extended their reach both backward to mortgage origination and forward to underwriting and servicing. Their ability to make money at every stage of the process by capturing fees meant that the three markets were no longer separate. They had been combined into a single market with players vying for opportunities at all parts of the market.

It is useful to document the growth of the business of MBSs since the early 1990s. The American mortgage market was about $500 billion in 1990. It went up to nearly $ 1 trillion in 1993 and reached around $ 1.5 trillion in 1998. The real change in the market began in 2001 (the year of the stock market crash). The real estate mortgage market in the United States climbed from about $1 trillion in 2000 to almost $4 trillion in 2003. It then dropped to $3 trillion between 2004 and 2006. Then it dropped in 2007 to about $2 trillion and in the crash in 2008, to $1.5 trillion.

Important factors in the 1990s and 2000s housing booms were the prolifera­tion of mortgage securitization tools and the increased participation of the bigger banks in these processes. The large banks entered these markets with the goal of growing them. They aggressively used securitization tools as a way to raise money for mortgages and a way to sell them. In 1996, the largest players in the mortgage market were mostly either mortgage specialists such as Country­wide and NW Mortgage or regional commercial banks such as Fleet Financial and PNC Financial Services. But by the end of the second bubble, the identities of the largest loan originators had changed. Now the largest mortgage origina­tors were the large national bank holding companies such as Wells Fargo, Citibank, and Bank of America. Countrywide had turned itself into a national bank as had Chase, Wachovia, and Washington Mutual. These large players grew larger as the national market expanded.

One of the least remarked upon features of the mortgage origination market is the degree to which it became concentrated over the period. The market share of the top five originators stood at 16.3 percent in 1996, a remarkably unconcen­trated figure. But in 2007, the top five originators accounted for 42 percent of a much larger market. In 1990, the twenty-five largest lenders accounted for less than 30 percent of the mortgage market. This rose steadily during the 1990s, and by 2007 the top twenty-five originators controlled 90 percent of the market. If one looks at the top ten conduits 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 fewer banks that were both larger and more nationally oriented (Fligstein and Goldstein 2010).

The housing bubble that began after 2001 had different causes; 2001 will be remembered as the year of the crash in “dotcom” stocks. But 2001 was also the year in which the Federal Reserve, in response to the crash, essentially lowered interest rates to zero. Its actions were met by similar actions in central banks around the world. The Federal Reserve did this to make sure that there was sub­stantial credit in the economy and that lending would continue. But the unin­tended effect of lowering interest rates so far was that it encouraged the housing bubble in the United States. The rapid rise of that bubble is astonishing.

The bubble was driven along by the availability of low cost loans. The process worked in the following way. Bank originators could use either their own capital or cheap borrowed capital to make loans to homebuyers. Then, they could turn around and turn these loans into MBSs and CDOs. If they used someone elses money (borrowed at, say, 1-2 percent), then they could essentially do the entire transaction with very low cost and relatively high fees. Beginning sometime around 2002, all banks began to realize that they could borrow money for 1-2 percent, create MBSs, and hold on to the MBSs, which might pay as much as 6-7 percent in interest. This allowed them to make a profit using other peoples money without risking their own capital.

The low interest rates in the United States and the world encouraged banks of all kinds to make as many loans as they could and to hold on to MBSs because they were earning money on borrowed money. The investment banks increased their holding of MBSs from about $35 billion in 2002 to $175 billion in 2007, a more than 400 percent increase. Commercial banks increased their holding of MBSs from $650 billion in 2002 to $1.1 trillion in 2007. Other private investors (including hedge funds) increased their ownership of MBSs during this period from $25 billion to $700 billion. Finally, mutual fund operators began to buy MBSs as well and went from about $400 billion to nearly $850 billion (Fligstein and Goldstein 2010).

Just as the civil rights movement s strategies and tactics spread to help give other social movements force and create new strategic action fields, so did the invention of securitization create other strategic action fields by being used to organize strategic action fields other than mortgages. The idea that underlying assets could be packaged and sold to investors as bonds that would pay out from the cash flow on these underlying assets caught fire. Markets sprung up in auto loans, credit card loans, equipment leases, home equity loans, mobile home loans, and student loans (Barmat 1990). These markets grew from about $450 billion in 1996 to about $2.3 trillion by 2006. This possibility created a huge expansion in all forms of consumer credit markets. This meant that nearly everyone who wanted to borrow money for nearly everything found a willing creditor to loan them money. These creditors frequently acted as loan origina­tors did in the mortgage markets. They would create debt and then sell off the rights to the cash flow to investment banks, which would package the debt into asset-backed securities (which were then called ABS).

Two sorts of secondary markets also grew up (Barmat 1990). First, the collat­eralized debt obligation market handles not only mortgages but also any asset products that can be broken up into “tranches” and sold as pieces of “risk” (Enron was one of the firms that expanded the use of these vehicles; see McLean and Elkind 2003). Second, the CDS market allowed firms to insure the risks they held on CD Os and other financial instruments. As the mortgage securitiza­tion market has been negatively affected by the collapse of the subprime lending market, this has put pressure on both the CDO market and the CDS market. In the CDS market, losses have been higher than expected. Since many firms bought CDSs to protect themselves against such risks, this has meant that holders of the CDSs have come under pressure to pay off their obligations. One of the largest players in the CDS market was the multinational insurance corpo­ration AIG, and its exposure in this market was the main cause of its takeover by the government.

The Causes of the Crisis

By 2003, investors of all kinds—commercial banks, investment banks, hedge fund traders, insurance companies, and other private investors—had figured out howto use leverage by borrowing money cheaply to buy MBSs and CD Os (some­times called just CDOs or MBS-CDOs). Investors who actually had cash, such as pensions funds, insurance companies, and governments and banks around the world, were seeking out safe investments that paid more than 1-2 percent, as did 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, MBSs were rated and it was possible to secure AAA rated bonds. This made American mortgages seem like low-risk, high-yield investments.

The real problem that eventually caused the worldwide financial crisis was that the supply of conventional mortgages peaked in 2003 and began a rapid decline thereafter (Fligstein and Goldstein 2010). About $2.6 trillion worth of conven­tional or prime mortgages were bought in 2003, and this dropped to $1.35 tril­lion, a drop of almost 50 percent, by 2004. So, while those who had money to buy MBSs were looking for product, those who were originating and packaging MBSs lacked enough to sell them. This meant that there was a huge incentive to increase the number of mortgages. This incentive sent loan originators looking for new markets to expand to feed the securitization machine. This created the subprime market, that is, the market to lend to people with poor credit histories and little in down payments. As noted earlier, the industrial scale of the subprime market was pioneered by Countrywide Financial. But all of the other players in the mortgage business had begun to follow suit in the late 1990s and began to buy up mortgage originators of subprime loans. After 2003, this process became even more pro­nounced as the search for new mortgage customers intensified.

In 2004, for the first time, the subprime loans exceeded the prime market. In the peak of the mortgage craze in 2006, fully 70 percent of all loans that were made were subprime mortgages. 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 famously testified before Congress that he did nothing to stop this rapid growth in subprime mort­gages because 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.

We would argue that the proximate causes of the crisis are twofold. First, the easy credit available to all forms of financial investors after 2001 meant that profits could be made by borrowing money at a low interest rate and then turning around and buying MBSs. This process of leveraging was the core strategy of banks and many other financial institutions. Investors worldwide who were not leveraged were also searching for higher, but safe returns, and American mort­gages looked good to them. But the second cause (which is not well understood) is as important as the first. By 2003, there were simply not enough prime or con­ventional mortgages available in the United States to package into MBSs. This brought about a search for new customers, many of whom had less money to put down or worse credit. It was the dramatic growth of the subprime market that came to replace the prime or conventional market. The aggressive pursuit of that market by banks of all kinds led us to the current situation.

There were two main forces that eroded the positions of banks and the GSEs by 2007. First, the rate of foreclosures on AAA subprime MBS bonds turned out to be higher than was predicted. This in turn led bond rating agencies to down­grade these bonds. As their price dropped, banks that had taken loans to buy the MBSs had to either pay off those loans or put up more collateral to keep them. This was because most of their loans contained covenants that required them to up their capital investment if bond prices fell. Most banks were very highly lev­eraged and eventually found it impossible to raise enough capital to cover their loans. By mid-2007, it was clear that subprime mortgages were undermining bond prices, and pressure was brought to bear on all of the banks. By spring of 2008, banks such as Bear Stearns began to fail. The entire mortgage securitiza­tion industry has undergone reformation as many banks have failed and the gov­ernment took over Freddie Mac and Fannie Mae.

What prevented an even worse meltdown and 1930s-style depression was the government s takeover of the GSEs and propping up of the rest of the banking system. The strategic action field of the mortgage market is still one character­ized by the industrial organization of banks. But now, the government is the prime player. 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 United States. Ironically, in the 1960s, the government set up the GSEs and created the MBSs so they could increase home ownership without direct government ownership of mortgages. But their forty-year efforts to create a large private market for mortgages rose spectacularly and failed. Today, they own the largest share of the market.

The Impact of the Strategic Action Field Based on the Industrial Model on Other Strategic Action Fields

In retrospect, we can see a number of important effects of the emergence of the industrial model of mortgages on other strategic action fields. The most impor­tant effect was that the strategic action fields of mortgage origination, securitiza­tion and bond creation, and investment in assets (particularly in real estate) all became combined into a single strategic action field. This new strategic action field was one of the largest industries in the United States. It also heavily affected nearby strategic action fields such as construction, residential real estate, com­mercial real estate, furnishings, and all other industries related to housing. These markets rose and fell as the ability for consumers to take out loans against the rising values of their homes greatly affected all forms of consumption. The secu­ritization of mortgages spread to other products as well: student loans, auto loans, credit card debt, and industrial loans.

Indeed, the entire banking industry in the United States was transformed as the barriers between types of banking fell and banks became focused on Ameri­can mortgages. In the world of 1990, it was possible to identify banks that were in distinct lines of separate businesses. The investment bank business, for ex­ample, was relatively small and most focused on the issuance of corporate secu­rities, the sale of treasury securities, and the business of mergers and acquisitions. By the early 2000s, the MBS business and its CDO cousins were the dominant business of investment banks. The MBS and CDO businesses grew so large that they also came to dominate the hedge fund, mutual fund, and securities trading industries. By the time the housing crisis began in 2007, it was difficult to see any financial firms that were not in some way or another connected to the field of mortgages.

The industrial model of the mortgage industry had an even more profound effect on homeowners. First, because of the incessant need to continue to find new mortgages, banks created more and more lenient products that allowed consumers to take out more and more debt. Banks had a very high incentive to make subprime mortgages: they could make more money off of fees, and the higher interest rates required of riskier borrowers implied higher returns as well. Together, this encouraged predatory lending and increased borrowing. In the early 1990s, consumers began to treat the rising value of their homes as cash machines that they could use to refinance and take money out. Banks encour­aged these practices because of the fees generated every time a loan was refi­nanced and the odds that the loan would require a higher interest rate when refinanced. The huge overextension by American consumers on all forms of credit was driven not just by their greed or desire to live beyond their means. It was also propelled by the large, vertically integrated banks, which needed to con­tinue to generate fees from loan transactions and to increase their margins by making riskier and riskier loans.

The importance of the mortgage market for the U.S. economy more generally became apparent when housing prices started to slow their rate of increase. It now seems ironic that regulators missed the close interdependence of banks, traders, the stock market, and the local real estate economy based on the building, sale, and furnishing of homes. They thought that all of these markets were not interdependent fields, but instead separate entities. As late as 2008, Ben Bernanke, the president of the Federal Reserve, viewed the subprime crisis as a small blip in an otherwise healthy economy. What Bernanke did not understand was that the entire banking system was making money off of sale, packaging, and holding of mortgages as investments.

Because in 2008, 70 percent of mortgages were nonconventional, Bernanke missed that the entire financial system and the local economies dependent on residential and commercial real estate were all being driven by house price increases. We can see in retrospect that once those prices slowed down and con­sumers could no longer refinance their loans, it was obvious that the whole thing would come crashing down. However, we only see that now because we know of the size, importance, and interconnectedness of the strategic action fields.

The complex of strategic action fields that arose as a result of the collapse of the strategic action field of the savings and loan banks has just been sketched out here. Much work remains to be done to show these connections as they evolved over time. What is clear is that the strategic action field approach is useful for understanding the structure of the mortgage market up until the mid-1980s, the crisis that destroyed that structure, and the role of a new set of even more pow­erful and connected structures. We have documented the central role of the gov­ernment in all of these processes. We have also shown how the GSEs played the role of internal governance for the market from the mid-1980s onward. In these ways, our story of the changes in the strategic action fields of the mortgage industry parallels the story of the civil rights movement.

Conclusion

The stories of the civil rights movement and the transformation of the U.S. mort­gage market obviously concern very different kinds of politics, organizations, ideas, frames, and actors. Yet, if we are right, the underlying logic of both reflects the structure and operation of strategic action fields. In both cases, there was an existing order, one that all of the actors understood and one that had rules, laws, and practices that governed interactions, defined an incumbent-challenger structure, and made it possible to identify who occupied which positions within the field. The “game” in each field was well defined. In the case of the field of U.S. racial politics, local, state, and federal institutions and actors were designed to segregate the African American population by the use of legal and extralegal means. This system proved resistant to change for at least seventy-five years. In the case of the mortgage industry in the United States, the savings and loan banks dominated the field with the help and support of the federal government, which guaranteed deposits and provided terms for mortgages and insurance against their default. This system came into being during the Depression of the 1930s and lasted until the mid-1980s.

The crises for both systems are to be found in their links to other strategic action fields. In the civil rights case, destabilizing changes in the Democratic Party, the field of U.S. constitutional law, and the international nation-state system contributed to undermining incumbent segregationist control over the national field of racial politics. In the case of the mortgage market, the federal government s attempt to increase home ownership pioneered new forms of mortgage finance. They also produced new GSEs to promote those forms. But the real blow to the savings and loan bank-dominated strategic action field was the bad economy of the 1970s, which made it difficult for these banks to get de­posits while they had on their books many loans that were not very profitable. The federal government tried to solve these problems by allowing the deregula­tion of the savings and loan. But that turned out to be a disaster for the banks.

Hie undermining of the given order in both cases allowed a reorganization of the strategic action fields under new principles. Here, some challenger organiza­tions already existed or came from a nearby field, but a number of them were founded in these eras to pioneer new tactics. In the case of the civil rights move­ment, the five largest civil rights organizations were able to form a political coa­lition early on to contest the power of the segregationists at the local, state, and federal levels. Their basic argument, that all citizens were entitled to civil rights, worked to reorganize the field of political race relations in the United States. In the mortgage market, in the wake of the collapse of the savings and loan banks, the federal government through the GSEs began to be the main player in the market. But some banks saw the collapse of the industry as an opportunity and aggressively entered the market. The pioneer in this regard was Countrywide Financial, which invented the industrial conception of the market. Their idea spread across the ranks of all kinds of banks and other financial institutions. This created a vertically integrated industry in which banks made profits at all points in the process.

Both successful strategic action field projects spawned new fields. In the case of civil rights, the language and tactics of movement groups were used by other insurgent groups in the United States and the world. In the case of mortgage se­curitization, several nearby industries sprung up. One set of industries found new kinds of assets to securitize. Others pioneered new kinds of financial prod­ucts, for better or for worse, such as subprime loans, CD Os, and CDSs.

Our analyses show the underlying usefulness of the strategic action field ap­proach. The perspective alerts analysts to a finite number of key issues and topics central, in our view, to an understanding of change and stability in strategic ac­tion fields. More specifically, it pushes analysts to define the purpose of the field; the key field actors (e.g., incumbents and challengers); the rules that structure relations and action in the strategic action field; the external fields—state and nonstate—that are most important to the reproduction of the strategic action field; and the IGUs that are in place and how they function to stabilize and sus­tain the field.

These issues are key to understanding field stability. Crisis and change in a field, however, requires attention to a number of additional topics, including the following: the events or processes—typically emanating in one or more proxi­mate fields—that serve to destabilize the field; the specific challengers who come to the fore to exploit the situation; their alternative vision for the field; and the actions taken by all parties to the conflict—incumbents, challengers, exter­nal state and nonstate actions—to effect a new settlement. Finally, the analyst will need to be attuned to the terms of the new settlement and how it, among all proposed solutions, came to carry the day. The two cases presented in this chap­ter were structured around these very issues. In the next chapter, however, we will move beyond specific cases and talk in more generic terms about the meth­odological implications and requirements of our approach.