Saturday, 31 October 2020
The financial crisis of 2008 was one of the worst economic disasters in recent history, and the shockwaves from the global recession it caused are still being felt today. We will outline the key developments in the 2008 financial crisis timeline on a month-by-month basis. The roots of the crisis can be found in banks making too many risky investments, especially in subprime mortgage loans. The big banks packaged risky mortgage loans into investment securities, sold the securities to each other, and then insured the investments with exotic and risky forms of insurance known as credit default swaps (CDS). These interrelated investments tied the banks to each other: If one bank went bankrupt, the problem would infect others and eventually the entire financial system. This is how banks became “too big to fail.”
By the final months of 2007, the U.S. housing market and global credit markets were under a great deal of pressure. The slowing U.S. economy lowered home values, subprime borrowers started defaulting on their loans, pushing the banks to declare huge losses from subprime mortgage investments. This negative feedback loop sparked a major liquidity shortage, as the banks reduced lending to one another because of the spiraling losses.
Interbank lending is the vital circulatory system of the global financial system. In an effort to jump-start interbank lending and ease the liquidity crisis, central banks around the world — including the U.S. Federal Reserve — began cutting interest rates and offering emergency lending for the banking sector.
On Jan. 11, Bank of America announced that it would buy mortgage lending giant Countrywide Financial Corporation (the deal would be completed later in the year). Countrywide was a key subprime mortgage lender, and it was hemorrhaging money as more and more borrowers defaulted on their mortgage loans. Although the purchase looked like a deal at the time, Bank of America wound up losing over $40 billion due to the acquisition.
On Jan. 21, stock markets around experienced the largest losses since Sept. 11, 2001. The next day, the Fed lowers the key federal funds rate by 75 basis points to 3.5%, the biggest decrease in 25 years. Stock markets rebounded momentarily, but by Jan. 30th, the Fed was forced to cut rates again, this time by 50 basis points, to 3.0%.
The federal funds rate is the key benchmark for interest rates throughout the financial system. When the Fed cut rates, it was looking to drive a reduction in market rates for consumers. The hope was that lower rates would spur consumers to take out mortgages and buy homes — helping current homeowners get out of overpriced, failing mortgages rather than default on their loans.
On Feb. 13, President George W. Bush signed the Economic Stimulus Act of 2008. The law included measures to boost spending by consumers and businesses, in an attempt to avoid a recession.
Freddie and Fannie are known as government-sponsored enterprises (GSEs), and together with the FHA, they buy mortgages from lenders and package them into securities, which are sold to investors. The hope was that the higher loan limits would ease the mortgage crisis in hot spots where housing had become very overvalued. However, home sales continued to fall and foreclosures continued to rise.
During the first two weeks of the month, the Fed announces several programs to increase loans to banks and other organizations, with the hope of increasing liquidity (i.e., the flow of money).
Backed by financing from the Federal Reserve, JPMorgan Chase agrees to buy Bear Stearns on March 16. Bear Stearns had been one of the largest global investment banks in the US, but was failing due to its investments in subprime mortgages.
On March 18, the Fed drops the reserve rate to 2.25%.
In early April, the International Monetary Fund (IMF) warned that the financial crisis could go beyond the subprime mortgage market. It warns that the overall global losses could be higher than $1 trillion.
Then, at the end of the month, the Fed cut interest rates again, by 25 basis points to 2%. In the meantime, the Fed continued its efforts to improve liquidity by offering more loans to financial institutions and increasing the types of assets the financial institutions can use as collateral for the loans.
On June 19, it was declared that since March, the FBI had arrested 406 people that it alleged were part of mortgage fraud schemes.
Federal regulators seized IndyMac Bank, a major mortgage lender, at the beginning of July, making it one of the largest bank failures in U.S. history. Customers waited in long lines, hoping to withdraw their money before the bank failed. The bank reopened after several weeks as IndyMac Federal Bank.
Denmark announced it was the first European Union country to enter recession, as its economy shrunk for two quarters in a row.
On July 13, the Fed increased credit lines to Fannie and Freddie, and authorized the Federal Reserve Bank of New York to lend the GSEs money. It also gave the Treasury department temporary authorization to buy shares of the GSEs.
President Bush signed the Housing and Economic Recovery Act of 2008 to combat the housing crisis. The act revised regulations for the GSEs, increased GSE loan limits, created a temporary tax credit for people who purchased a new principal residences and temporarily authorized the FHA to refinance mortgages for homeowners who were having trouble making payments.
The federal government took over the GSEs, Fannie Mae and Freddie Mac on Sept. 7 in one of the largest bailouts in U.S. history. The two companies held about half of all mortgage loans in the U.S. at that time, and their stock prices had fallen over 75% each. The fear was that their collapse could have disastrous repercussions for the economy.
On Sept. 11, Lehman Brothers, a major investment bank, reported $4 billion in quarterly losses and disclosed that it was looking for a company to buy the firm. The U.S. Department of the Treasury and private bankers worked together to make a deal that would work. However, events would overtake them:
After a long weekend of unrestrained panic and intense negotiations, Congress passed a revised version of TARP and President Bush signed the program into law. TARP gave the government authority to buy “troubled assets” from private companies, in yet another attempt to stabilize the U.S. financial system.
Upstaging Citigroup, Wells Fargo announced a bid to buy Wachovia on Oct. 3. Wells Fargo ends up getting Wachovia in the end, instead of Citigroup.
The government bailout of AIG is restructured on Oct. 8, giving the company access to more funds.
The week of Oct. 6-10 was the worst week ever for the Dow Jones Industrial Average. The crisis spread to the auto industry as auto sales dropped sharply.
Stock markets plunged around the world. Central banks from Britain, Canada, China, the EU, Sweden, Switzerland and the U.S. worked together to further lower interest rates. The Fed cut rates twice in October, to 1.5% on October 8 and then to 1% on October 29. By the end of October, U.S. consumer confidence had fallen to an all-time low.
The AIG bailout was restructured again on Nov. 10, reducing the loan amount, lowering the interest rate and giving the company more time to repay the money. The Treasury department agreed to purchase an additional $40 billion in AIG stock.
The Treasury department, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD) and HOPE NOW alliance announced a new loan modification program that could help mortgage holders who wanted to keep their homes.
On Nov. 12, Paulson announced plans to use TARP funds to ease credit markets rather than purchase troubled assets from financial institutions.
The CEOs of the Big Three auto companies, General Motors, Chrysler and Ford flew to Washington, D.C. on Nov. 18 to request TARP funds.
On Nov. 23, the government bailed out Citigroup.
Fannie Mae and Freddie Mac announced they would stop foreclosing on occupied homes from Nov. 26 to Jan. 9, 2009.
On the 25th, the Fed rolled out a plan to keep interest rates low by purchasing government bonds and mortgage-backed securities. Called quantitative easing (QE), the plan continues to this day. The Treasury and the Fed also announce the Term Asset-Backed Securities Loan Facility (TALF), which made an additional $200 billion in loans available to financial institutions with the goal of increasing consumer lending.
On the first of the month, the National Bureau of Economic Research confirmed that the U.S. was in a recession that had begun a year earlier, in December 2007. On Dec. 5, monthly job reports disclosed that over 500,000 jobs were lost in November — one of the largest declines in 30 years — and employment had decreased by 1.9 million jobs since August.
On Dec. 19, the Treasury department announces it would use TARP funds to bail out General Motors and Chrysler.
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Source: https://www.magnifymoney.com/blog/banking/2008-financial-crisis-timeline/
