In a new book entitled “Financing Failure: A Century of Bailouts,” Vern McKinley provides the most detailed account yet of the government’s decision-making process during these momentous events.

At this AEI event, Wharton professor Joseph Gyourko discusses the implications of his research on the Federal Housing Administration. Edward Pinto, AEI scholar and housing finance expert, will respond.

When the bubble deflated in 2007, an unprecedented number of weak mortgages went into default - those that were held or guaranteed by Fannie and Freddie, and those that had been securitized by Wall Street. This drove down housing prices and threw Fannie and Freddie into insolvency. 

Leveraged bets as high as 30 to 1 on risky investments with little equity cushion against potential losses is what helped bring down the likes of Lehman Brothers, Bear Stearns, Fannie Mae and Freddie Mac. Think it can't happen again? It's about to—with the Federal Housing Administration.

Bear Stearns had a credit crisis and neededa bailout.

The evolving narrative of the events of 2008 represents a similar error in our understanding. The current metaphor seems to be that the global economy was hit by a "perfect storm" of disruptive forces late in 2008.

In the case of the asset backed securities portfolio that the Fed acquired in support of the Bear Stearns acquisition by JPMorgan Chase the Shadow Financial Regulatory Committee suggested that the Fed disclose the names of counterparties to transactions, how transactions were priced, the quality and extent of collateralization and the current market-to-market values on those assets.

The underlying idea—that financial institutions are "interconnected" and the failure of one will drag down others - is not implausible. But like so much else that underlies the Dodd-Frank Act, it was accepted as true—and acted upon—without much evidence, or even much thought.