Case | HBS Case Collection | January 2008 (Revised May 2008)

Subprime Meltdown: American Housing and Global Financial Turmoil

by Julio Rotemberg

Abstract

This case focuses on the financial difficulties faced in the U.S. from August to December 2006 as well as their roots in subprime lending. After briefly discussing how mortgages were structured and traded in the pre-1990 period, it describes subprime mortgage lending, as well as other innovative mortgages issued in the 1990s. It also discusses how these mortgages were packaged into securities, and who ultimately came to own these claims and their attendant risk. The case then describes the pain inflicted by raising foreclosures, as well as the financial market ramifications of the rise in mortgage delinquencies. It also chronicles the response of the U.S. and European central banks to the unfolding financial difficulties. Lastly, the case lays policies that have been proposed to deal with either the consequences or the causes of the crisis. These include policies for reforming the supervision of the financial system, changing bankruptcy rules and regulating mortgage finance. Some attention is paid to the role of credit rating agencies in the crisis, and in the financial system as a whole.

Keywords: Financial Crisis; Insolvency and Bankruptcy; Central Banking; Financial Markets; Mortgages; Governing Rules, Regulations, and Reforms; Policy; United States;

Citation:

Rotemberg, Julio. "Subprime Meltdown: American Housing and Global Financial Turmoil." Harvard Business School Case 708-042, January 2008. (Revised May 2008.)