Financial markets as production markets: The industrial roots of the mortgage meltdown

The 2007-2009 financial crisis was centered on the US mortgage industry. This article develops a distinctly sociological explanation of that crisis by focusing on the organization of firms in the production of mortgage-backed securities. 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. 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. Among large banks globally, those which were more vertically integrated also experienced greater investment losses. The findings challenge existing conventional accounts of the crisis and provide important theoretical implications for the social-scientific study of financial markets.