Echoes of the Financial Crisis
Another Major Bank Faces Fines for the 2008 Crisis
On August 1st, the Justice Department stated that Wells Fargo has agreed to pay a $2 billion fine for its role in the 2008 crisis.
Similar to other major banks like Bank of America, which payed $16.7 billion in 2014, Wells Fargo recklessly embraced the philosophy of “courageous underwriting” in its mortgage loans.
This philosophy encouraged bank underwriters to give out more loans by being ignorant to the client’s financial status.
The resulting disparity between the client’s debt and the actual amount they could afford was present in 70% of the bank’s loans during that period according to the DOJ.
These loans were sold with most bankers knowledgeable of the fact that these borrowers could never pay back these loans. Furthermore, often the loan would be sold off to another institution, further increasing the desire to aggressively originate.
The combination of increasing demand met by aggressive loaning from banks formed the housing bubble in 2008, which ultimately crashed, leading to the Great Recession.
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Written by Michael Ding, Edited by Rachel Weissman & Alexander Fleiss