A little more than a decade ago, William Brennan foresaw the financial collapse of 2008.
As director of the Home Defense Program at the Atlanta Legal Aid Society, he watched as subprime lenders earned enormous profits making mortgages to people who clearly couldn’t afford them.
The loans were bad for borrowers — Brennan knew that. He also knew the loans were bad for the Wall Street investors buying up these shaky mortgages by the thousands. And he spoke up about his fears.
“I think this house of cards may tumble some day, and it will mean great losses for the investors who own stock in those companies,” he told members of the Senate Special Committee on Aging in 1998.
It turns out that Brennan didn’t know how right he was. Not only did those loans bankrupt investors, they nearly took down the entire global banking system.
Washington was warned as long as a decade ago by bank regulators, consumer advocates, and a handful of lawmakers that these high-cost loans represented a systemic risk to the economy, yet Congress, the White House, and the Federal Reserve all dithered while the subprime disaster spread. Long forgotten Congressional hearings and oversight reports, as well as interviews with former officials, reveal a troubling history of missed opportunities, thwarted regulations, and lack of oversight.
What’s more, most of the lending practices that led to the disaster are still entirely legal.
Growth of an Industry
Congress paved the way for the creation of the subprime lending industry in the 1980s with two obscure but significant banking laws, both sponsored by Fernand St. Germain, a fourteen-term Democratic representative from Rhode Island.