American Sociological Review 1–27 © American Sociological Association 2016 DOI: 10.1177/0003122416645594 http://asr.sagepub.com A large journalistic and scholarly literature explores the causes and consequences of the U.S. financial crisis of 2007 to 2009 (Lo 2012). Sociologists have made many contri- butions to these accounts (Lounsbury and Hirsch 2010). But one of the most interesting and important aspects of the crisis remains understudied—fraud among the largest finan- cial institutions (Shover and Grabosky 2010). This article examines the characteristics and causes of fraud in the mortgage securitization industry during the financial crisis. Fraud was diverse. Mortgage originators deceived bor- rowers about loan terms and eligibility require- ments, and sold loans they knew were likely to default. Banks that packaged mortgages into 645594ASR XX X 10.1177/0003122416645594American Sociological ReviewFligstein and Roehrkasse 2016 a University of California-Berkeley Corresponding Author: Neil Fligstein, Department of Sociology, 410 Barrows Hall, University of California-Berkeley, Berkeley, CA, 94720-1980 E-mail: fligst@berkeley.edu The Causes of Fraud in the Financial Crisis of 2007 to 2009: Evidence from the Mortgage-Backed Securities Industry Neil Fligstein a and Alexander F. Roehrkasse a Abstract The financial crisis of 2007 to 2009 was marked by widespread fraud in the mortgage securitization industry. Most of the largest mortgage originators and mortgage-backed securities issuers and underwriters have been implicated in regulatory settlements, and many have paid multibillion-dollar penalties. This article seeks to explain why this behavior became so pervasive. We evaluate predominant theories of white-collar crime, finding that theories emphasizing deregulation or technical opacity identify only necessary, not sufficient, conditions. Our argument focuses instead on changes in competitive conditions and firms’ positions within and across markets. As the supply of mortgages began to decline around 2003, mortgage originators lowered credit standards and engaged in predatory lending to shore up profits. In turn, vertically integrated mortgage-backed securities issuers and underwriters committed securities fraud to conceal this malfeasance and enhance the value of other financial products. Our results challenge several existing accounts of how widespread the fraud should have been and, given the systemic crimes that occurred, which financial institutions were the most likely to commit fraud. We consider the implications of our results for regulations that were based on some of these models. We also discuss the overlooked importance of illegal behavior for the sociology of markets. Keywords white-collar crime, finance, organizations, markets at UNIV CALIFORNIA BERKELEY LIB on July 25, 2016 asr.sagepub.com Downloaded from