Most Important of 2007

Housing collapsed. The dollar sank. Oil rose. The Dow fluctuated. Britney imploded. At least there was the iPhone and a Police reunion tour

SPECIAL REPORT

Best & Worst Products, Peoples and Trends 2007

• Most Important of 2007
• Slide Show: The Most Important Products of 2007
• Slide Show: The Most Important Trends of 2007
• Even Hot Housing Markets Can Go Cold

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Some years seem longer than most. For many, 2007 may seem like one of the longest on record—especially if you are a homeowner, an American tourist in Europe, an SUV driver, or a Wall Street CEO.

That's because 2007 put an official end to the easy-money party that has driven the U.S. economy over the past few years. As many people feared it would, the housing bubble popped as millions of subprime adjustable-rate mortgages reset to higher rates, with the unsurprising result that many homeowners found they could no longer afford their monthly payments. Not only that, but they also found no one wanted to buy their homes because rates were climbing and property prices were falling. The inescapable result was that millions of homeowners began facing foreclosure and the banks that had loaned out the money saw the value of their mortgage portfolios tank (BusinessWeek.com, 3/2/07).

Soon, it became apparent the losses on failed mortgages would be in the billions, if not trillions (BusinessWeek.com, 11/19/07).

Domino Effect

First, Bear Stearns (BSC) warned last June that two of its hedge funds had taken significant hits (BusinessWeek.com, 6/12/07). These were dwarfed in October when Merrill Lynch (MER) announced it would be writing down nearly $8 billion (BusinessWeek.com, 10/23/07) as a result of bad bets in the mortgage market, which led to the defenestration of its chief, Stanley O'Neal.

Then, on Nov. 4, Citigroup's (C) embattled CEO Charles Prince resigned (BusinessWeek.com, 11/5/07) shortly after disclosing the company's losses in the credit markets might reach $17 billion—nearly three times more than the company estimated in October.

The most recent high-profile victim of bad mortgage bets is Morgan Stanley's (MS) co-President Zoe Cruz, a 25-year veteran of the company and long considered one of the most powerful women on Wall Street. She was terminated on Nov. 30 after the bank suffered $3.7 billion of subprime mortgage-related losses in September and October.

The subprime fallout just keeps rolling—and the reality is it won't go away in 2008, even though Treasury Secretary Henry Paulson was able to push through a plan (BusinessWeek.com, 12/6/07) to relieve many homeowners facing foreclosure. November hit another record for foreclosures, and for the third quarter of the year delinquencies were at their highest rate since 1986, according to the Mortgage Bankers Assn.