Déjà Vu

Like the credit boom of the 1920s, the toxic credit bubble of the 2000s precipitated a devastating global financial crisis. The desire to earn quick profits from originating and securitizing subprime loans corrupted the risk management practices of large financial conglomerates and the credit review practices of credit ratings agencies that assigned investment ratings to mortgage-related securities. By the end of 2006, U.S. credit markets resembled an inverted pyramid of risk, in which multiple layers of financial bets depended on the performance of high-risk subprime loans held in securitized pools. When housing prices began to fall and subprime loans began to default in large numbers in 2007, the leveraged bets on top of that pyramid of risk blew up and inflicted devastating losses on financial institutions and investors in the U.S. and Europe. Officials on both sides of the Atlantic were slow to recognize and respond to the severity of the crisis. The Federal Reserve Board and the Treasury Department missed multiple warning signs that should have caused them to increase their oversight of major U.S. banks and other large financial institutions during 2007 and early 2008.