Financial crisis of 2007-2008

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The Financial crisis of 2007-2008, initially referred to as "the credit crunch" or "the credit crisis", first became apparent on August 9, 2007 when a loss of confidence by investors in the value of securitized mortgages resulted in a liquidity crisis which required the massive injection of capital into financial markets by the Federal Reserve and the European Central Bank[1][2] The initial liquidity crisis, which, in hind sight, can be seen to have resulted from the incipient Subprime mortgage crisis, was followed by a run on Northern Rock, a major British bank, in mid-September.[3]

Contents

Historical background

Excesses of the United States housing bubble resulted in many subprime mortgages, which led to the subprime mortgage crisis. Accelerating rates of forclosure underlaid the developing financial crisis.

Initially the companies affected where those directly related to home construction and mortgage lending such as Northern Rock and Countrywide Financial, and financial institutions which had engaged in securitization of mortgages such as Bear Stearns, but as the crisis accelerated in late summer following placing of Fannie Mae and Freddie Mac into conservatorship, the crisis began to affect both the general availability of credit[4] and larger financial institutions not directly connected with mortgage lending, but which had exposure due to holding of mortgage-backed securities or insurance of them such as Lehman Brothers,[5] AIG, Merrill Lynch,[5] and HBOS.[6] Other firms under pressure included Washington Mutual, the largest savings and loan in the United States,[7] and the remaining large investment firms, Morgan Stanley and Goldman Sachs.[8]

Week of September 15

The week beginning September 15 was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15, and Wednesday, September 16. Toward the end of the week, short selling was suspended in both the United Kingdom and the United States.[9] and a plan was floated for the United States government to purchase "illiquid assets" resulting from the subprime mortgage crisis from troubled financial institutions.[10][11] On September 19 Deposit insurance was offered temporarily in the US to money market fundss by the US Treasury.[12] Money market funds had come under increasing pressure as the financial crisis reached an acute phrase.[13] Consultations of the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the Securities and Exchange Commission with Congressional leaders and the President of the United States coupled with development of plans to advance a comprehensive solution to the problems created by illiquid assets and other measures resulted in some restoration of confidence in markets on September 19.[14][15]

Bailout

At the close of the week of September 15 there was announcement by the financial leaders of the United States government of plans for the federal government to buy a substantial amount of the illiguid assets resulting from securitization of subprime and adjustable rate mortgages. This plan was received favorably by investors in the stock market. Details of the bailout remain uncertain; estimates of the cost of purchasing and resolving outstanding troubled mortgages and mortgage securities range from 500 billion dollars to 1 trillion dollars.[16] A Draft Proposal for Bailout Plan calls for the program to be administered by the Department of the Treasury and sets a limit of 700 billion dollars.[17][18]

Week of September 28, 2008

In the wee hours of Sunday morning an announcement was made by the Secretary of the Treasury and congressional leaders that agreement had been reached on all major issues: the total amount of $700 billion remained with provision for the option of creating a scheme of mortgage insurance.[19] It was reported on Sunday, September 28, that action would be taken regarding the British mortgage lender Bradford & Bingley.[20] Grupo Santander, the largest bank in Spain, is slated to take over the offices and savings accounts while the mortgage and loans business will be nationalized.[21] Fortis, a huge Benelux banking and finance company was partially nationalized on September 28, 2008, with Belgium, the Netherlands and Luxembourg investing a total of 11.2 billion euros (16.3 billion U.S. dollars) in the bank. Belgium will purchase 49% of Fortis's Belgian division, with the Netherlands doing the same for the Dutch division. Luxembourg has agreed to a loan convertible into a 49% share of Fortis's Luxembourg division.[22] It was reported on Monday morning, September 30, that Wachovia, the 4th largest bank in the United States, would be acquired by Citigroup.[23][24] Other European rescues reported Monday were of Hypo Real Estate, a holding company based in Munich which comprises a number of real estate financing banks and of Glitnir, Iceland’s third largest lender. Stocks fell dramatically Monday in Europe and the US despite infusion of funds into the market for short term credit.[25][26]

The bailout plan, now named the Emergency Economic Stabilization Act of 2008 and expanded to 106 pages was slated for consideration in the House of Representative Monday, September 30 as HR 3997 and in the Senate later in the week.[27][28] Text and summary of the Emergency Economic Stabilization Act of 2008. The plan failed after the vote being held open for 40 minutes in the House of Representative, 205 for the plan, 228 against.[29][30] Meanwhile US stock markets suffered steep declines, the Dow losing 300 points in a matter of minutes and the S.&P. 500 off 7% for the day.[31]

External links and further reading

References

  1. "A New Kind of Bank Run Tests Old Safeguards" News analysis by Floyd Norris in The New York Times August 10, 2007
  2. "Credit crisis - how it all began Suddenly, one August day last year shook the world, turning an Edwardian summer of prosperity into a grim financial crisis" special report by Larry Elliott, economics editor, The Guardian, Tuesday August 5 2008
  3. "News Release Liquidity Support Facility for Northern Rock plc", Tripartite Statement by HM Treasury, Bank of England and Financial Services Authority 14 September 2007
  4. "Pain Spreads as Credit Vise Grows Tighter" article by Louis Uchitelle in The New York Times September 18, 2008
  5. 5.0 5.1 "Lehman Files for Bankruptcy; Merrill Is Sold" article reported by Jenny Anderson, Eric Dash, and Andrew Ross Sorkin and written by Mr. Sorkin in The New York Times September 14, 2008
  6. "Lloyds Bank Is Discussing Purchase of British Lender" article by Julia Werdigier in The New York Times September 17, 2008
  7. "Washington Mutual Is Said to Consider Sale" article by Geraldine Fabrikant in The New York Times September 17, 2008
  8. "As Fears Grow, Wall St. Titans See Shares Fall" article by Ben White and Eric Dash in The New York Times September 17, 2008
  9. "S.E.C. Issues Temporary Ban on Short-Selling" article by Vikas Bajaj and Jonathan D. Glater in The New York Times September 19, 2008
  10. "Vast Bailout by U.S. Proposed in Bid to Stem Financial Crisis" article by Edmund L. Andrews in The New York Times September 18, 2008
  11. "Paulson Argues for Need to Buy Mortgages" article by David Stout in The New York Times September 19, 2008
  12. "Treasury Announces Guaranty Program for Money Market Funds"
  13. "Money Market Funds Enter a World of Risk" article by Tara Siegel Bernard in The New York Times September 17, 2008
  14. "Stocks Surge as U.S. Acts to Shore Up Money Funds and Limits Short Selling" article by Graham Bowley in The New York Times September 19, 2008
  15. "Congressional Leaders Were Stunned by Warnings" article by David M. Herszenhorn in The New York Times September 19, 2008
  16. "Bush Officials Urge Swift Action on Rescue Powers}" article by Edmund L. Andrews in The New York Times September 19, 2008
  17. "Rescue Plan Seeks $700 Billion to Buy Bad Mortgages" article by The Associated Press in The New York Times September 20, 2008
  18. "$700 Billion Is Sought for Wall Street in Vast Bailout" article by David M. Herszenhorn in The New York Times September 20, 2008
  19. "Breakthrough Reached in Negotiations on Bailout" article by David M. Herszenhorn and Carl Hulse in The New York Times September 27, 2008
  20. "Britain Close to Takeover of Another Lender" article by Landon Thomas, Jr. in The New York Times September 28, 2008
  21. "Taxpayers must risk billions for Bradford & Bingley" article by Philip Webster, Patrick Hosking and Tim Reid in The Times of London September 29, 2008
  22. van der Starre, Martijn; Meera Louis (2008-09-29). "Fortis Gets EU11.2 Billion Rescue From Governments". Bloomberg. http://www.bloomberg.com/apps/news?pid=20601087&sid=ahlKDjeO0Lik&refer=home. Retrieved 2008-09-29. 
  23. Sorkin, Andrew Ross (2008-09-30). "Citigroup to Buy Wachovia Banking Operations". The New York Times blog Dealbook. http://dealbook.blogs.nytimes.com/2008/09/29/citigroup-nears-a-deal-for-wachovia/index.html. Retrieved 2008-09-29. 
  24. Sorkin, Andrew Ross; Eric Dash (2008-09-28). "Citigroup and Wells Fargo Said to Be Bidding for Wachovia". The New York Times. http://www.nytimes.com/2008/09/29/business/29bank.html. Retrieved 2008-09-29. 
  25. Hunter, Michael; Neil Dennis (2008-09-29). "Heavy stock losses after Fed action". The Financial Times. http://www.ft.com/cms/s/0/d925b966-8dec-11dd-8089-0000779fd18c.html. Retrieved 2008-09-29. 
  26. Politi, James; Krishna Guha, Daniel Dombey and Harvey Morris (2008-09-29). "Central banks pump cash into system". The Financial Times. http://www.ft.com/cms/s/0/f9525dd4-8d24-11dd-83d5-0000779fd18c.html. Retrieved 2008-09-29. 
  27. Information from C-Span September 30, 2008
  28. Hulse, Carl; David M. Herszenhorn (2008-09-28). "Bailout Plan in Hand, House Braces for Tough Vote". The New York Times. http://www.nytimes.com/2008/09/29/business/29bailout.html. Retrieved 2008-09-29. 
  29. C-Span 2 PM 9/30/08
  30. Hulse, Carl; David M. Herszenhorn (2008-09-29). "House Rejects Bailout Package, 228-205, But New Vote Is Planned; Stocks Plunge". The New York Times. http://www.nytimes.com/2008/09/30/business/30bailout.html. Retrieved 2008-09-29. 
  31. Grynbaum, Michael M. (2008-09-30). "Stocks Plunge as House Rejects Bailout". The New York Times. http://www.nytimes.com/2008/09/30/business/30markets.html. Retrieved 2008-09-30. 

Portions of this article are adapted from the Wikipedia article "Financial crisis of 2007-2008" http://en.wikipedia.org/w/index.php?title=Financial_crisis_of_2007-2008&oldid=239540466 released under the GNU Free Documentation License 1.2

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