One of the great ironies of the 2008 financial crisis is that it was sparked by a product created from a historically safe investment asset: residential mortgages. In the past quarter century, delinquency rates of single-family home mortgages hovered below 3%[1] for the most part except for the time around the Great Recession, according to the Federal Reserve Bank of St. Louis. Then Wall Street bundled mortgages of various qualities into complex, opaque securities to be bought and sold, often using debt to turbo-charge the investment. When defaults began on Main Street, the tremors reached all the way around the world.
Today, the financial crisis seems like a footnote in history. But like other crises, it has sparked a period of soul-searching. What signs that a crisis was brewing did experts and regulators miss? Why didn’t regulatory reforms in the past prevent it? How could regulators stop another crisis from happening? What are the lessons from this and other meltdowns? These and other questions were the focus of a panel at the “Financial Markets, Volatility, and Crises: A Decade Later” conference held recently in New York by Wharton’s Jacobs Levy Equity Management Center for Quantitative Financial Research[2].
While this year is generally acknowledged to be the 10th anniversary of the crisis, in actuality there is “no real consensus about when it all began,” said Wharton finance professor Richard Herring[3], who moderated the panel. Some point to 2006 as the start, when home prices peaked, while others think it began with the 2007 collapse of two Bear Stearns hedge funds that bet heavily on subprime mortgages. Perhaps it was when BNP Paribas froze withdrawals[4] from $2.2 billion worth of funds in the same...