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The Transformation of Mortgage Finance and the Industrial Roots of the Mortgage Meltdown

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  • Fligstein, Neil
  • Goldstein, Adam
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    Abstract

    The 2007-2009 financial crisis was centered on the mortgage industry. This paper develops a distinctly sociological explanation of that crisis based on Fligstein’s (1996) markets as politics approach and the sociology of finance. We use archival and secondary sources to show that the industry became dominated by an “industrial†conception of control whereby financial firms vertically integrated in order to capture profits in all phases of the mortgage industry including the production of financial products. The results of multivariate regression analyses show that the “industrial†model drove the deterioration in the quality of securities that firms issued and significantly contributed to the eventual failure of the firms that pursued the strategy. We show that large global banks which were more involved in the industrial production of U.S. mortgage securities also experienced greater investment losses. The findings challenge existing conventional accounts of the crisis and provide important theoretical linkages to the sociology of finance

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    Bibliographic Info

    Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt2zx8r7fb.

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    Date of creation: 01 Oct 2012
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    Handle: RePEc:cdl:indrel:qt2zx8r7fb

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    Keywords: Social and Behavioral Sciences; Mortgage Finance; Mortgage Meltdown;

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    1. Ravi Jagannathan & Mudit Kapoor & Ernst Schaumburg, 2009. "Causes of the Great Recession of 2007-9: The Financial Crisis is the Symptom not the Disease!," NBER Working Papers 15404, National Bureau of Economic Research, Inc.
    2. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    3. Daniel Beunza & David Stark, 2004. "Tools of the trade: the socio-technology of arbitrage in a Wall Street trading room," Industrial and Corporate Change, Oxford University Press, vol. 13(2), pages 369-400, April.
    4. Efraim Benmelech & Jennifer Dlugosz, 2009. "The Credit Rating Crisis," NBER Working Papers 15045, National Bureau of Economic Research, Inc.
      • Efraim Benmelech & Jennifer Dlugosz, 2010. "The Credit Rating Crisis," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 161-207 National Bureau of Economic Research, Inc.
    5. Christopher J. Mayer & Karen M. Pence & Shane M. Sherlund, 2008. "The rise in mortgage defaults," Finance and Economics Discussion Series 2008-59, Board of Governors of the Federal Reserve System (U.S.).
    6. Christopher James & Joel Houston, 1996. "Evolution Or Extinction: Where Are Banks Headed?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(2), pages 8-23.
    7. Douglas W. Diamond & Raghuram Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," NBER Working Papers 14739, National Bureau of Economic Research, Inc.
    8. Alex Preda, 2007. "The Sociological Approach To Financial Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 21(3), pages 506-533, 07.
    9. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, October.
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