Global financial crisis in September 2. This article only provides a detailed description of the financial market events of September 2. For the background information, causes, effects and policy responses see Financial crisis of 2. For a timeline see Subprime crisis impact timeline. Prelude[edit]The subprime mortgage crisis reached a critical stage during the first week of September 2. US Government takeover of home mortgage lenders[edit]The United States director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, on September 7, 2.
2008-2009 Financial Crisis Pre Crisis The 2008 Financial Crisis: Institutional Facts, Data and Economic Research Saki Bigio Jennifer La’O August 29, 2011.
1 The Global Economic & Financial Crisis: A Timeline. Mauro F. Guillén. Director of the Lauder Institute. guillen@wharton.upenn.edu. Wednesday, February 7, 2007.
United States government- sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by FHFA.[2][3][4] United States Treasury Secretary Henry Paulson, at the same press conference stated that placing the two GSEs into conservatorship was a decision he fully supported, and said that he advised "that conservatorship was the only form in which I would commit taxpayer money to the GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction."[2] The same day, Federal Reserve Bank Chairman Ben Bernanke stated in support: "I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies."[5]Developing global financial crisis[edit]. Dow Jones Industrial Average Jan 2. Nov 2. 00. 8Beginning with bankruptcy of Lehman Brothers on September 1. American and European banks and efforts by the American and European governments to rescue distressed financial institutions, in the United States by passage of the Emergency Economic Stabilization Act of 2. European countries by infusion of capital into major banks. Afterwards, Iceland almost claimed to go bankrupt as the country's three largest banks, and in effect financial system, collapsed.[6] Many financial institutions in Europe also faced the liquidity problem that they needed to raise their capital adequacy ratio.
As the crisis developed, stock markets fell worldwide, and global financial regulators attempted to coordinate efforts to contain the crisis. The US government composed a $7. However, the plan failed to pass because some members of the US Congress rejected the idea of using taxpayers' money to bail out Wall Street investment bankers. After the stock market plunged, Congress amended the $7. The market sentiment continued to deteriorate, however, and the global financial system almost collapsed.
While the market turned extremely pessimistic, the British government launched a 5. The British government nationalized most of the financial institutions in trouble. Many European governments followed suit, as well as the US government.
Stock markets appeared to have stabilized as October ended. In addition, the falling prices due to reduced demand for oil, coupled with projections of a global recession, brought the 2. In the Eastern European economies of Poland, Hungary, Romania, and Ukraine the economic crisis was characterized by difficulties with loans made in hard currencies such as the Swiss franc. As local currencies in those countries lost value, making payment on such loans became progressively more difficult.[9]As the financial panic developed during September and October 2. U. S. Treasury bonds, gold, and currencies such as the US dollar (still widely perceived as the world’s reserve currency) and the Yen (mainly through unwinding of carry trades). This currency crisis threatened to disrupt international trade and produced strong pressure on all world currencies.
The International Monetary Fund had limited resources relative to the needs of the many nations with currency under pressure or near collapse.[1. A further shift towards assets that are perceived as tangible, sustainable, like gold[1. However, as events progressed during early 2. U. S. Treasury bonds which were the main refuge chosen.
This inflow of money into the United States translated into an outflow from other countries restricting their ability to raise money for local rescue efforts.[1. Major US financial firms' crisis[edit].
The collapse of Lehman Brothers was a symbol of the global financial crisis. On Sunday, September 1. Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. The significance of the Lehman Brothers bankruptcy is disputed with some assigning it a pivotal role in the unfolding of subsequent events.
The principals involved, Ben Bernanke and Henry Paulson, dispute this view, citing a volume of toxic assets at Lehman which made a rescue impossible.[1. Immediately following the bankruptcy, JPMorgan Chase provided the broker dealer unit of Lehman Brothers with $1.
Lehman and its clearance parties" according to a statement made in a New York City Bankruptcy court filing.[1. Can I Use Paypal Credit In Apple Store. The same day, the sale of Merrill Lynch to Bank of America was announced.[1. The beginning of the week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 1. Wednesday, September 1.
On September 1. 6, the large insurer American International Group (AIG), a significant participant in the credit default swaps markets, suffered a liquidity crisis following the downgrade of its credit rating. The Federal Reserve, at AIG's request, and after AIG had shown that it could not find lenders willing to save it from insolvency, created a credit facility for up to US$8. Money market funds insurance and short sales prohibitions[edit]On September 1. Reserve Primary Fund, a large money market mutual fund, lowered its share price below $1 because of exposure to Lehman debt securities. This resulted in demands from investors to return their funds as the financial crisis mounted.[2. By the morning of September 1. Federal Reserve averted an immediate collapse.[2.
On September 1. 9 the U. S. Treasury offered temporary insurance (akin to Federal Deposit Insurance Corporation insurance of bank accounts) to money market funds.[2. Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States.[2. Similar measures were taken by authorities in other countries.[2. Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission[2.
US Troubled Asset Relief Program[edit]On September 1. Secretary of the Treasury, Henry Paulson.
He proposed a Troubled Assets Relief Program (TARP), later incorporated into the Emergency Economic Stabilization Act, which would permit the United States government to purchase illiquid assets, informally termed toxic assets, from financial institutions.[2. The value of the securities is extremely difficult to determine.[3. Consultations between the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the U. S. Securities and Exchange Commission, Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage- backed securities. Of this time the President later said: "..
I was told by [my] chief economic advisors that the situation we were facing could be worse than the Great Depression."[3. At the close of the week the Secretary of the Treasury and President Bush announced a proposal for the federal government to buy up to US$7.
The draft proposal of the plan was received favorably by investors in the stock market. Details of the bailout remained to be acted upon by Congress.[3.
Week of September 2. On Sunday, September 2.
US investment banks, Goldman Sachs and Morgan Stanley, with the approval of the Federal Reserve, converted to bank holding companies, a status subject to more regulation, but with readier access to capital.[3. On September 2. 1, Treasury Secretary Henry Paulson announced that the original proposal, which would have excluded foreign banks, had been widened to include foreign financial institutions with a presence in the US. The US administration was pressuring other countries to set up similar bailout plans.[4. On Monday and Tuesday during the week of September 2. US Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve before Congressional committees and on Wednesday a prime- time presidential address was delivered by the President of the United States on television. Behind the scenes, negotiations were held refining the proposal which had grown to 4. On September 2. 5, agreement was reported by congressional leaders on the basics of the package; [4.
On Thursday afternoon at a White House meeting attended by congressional leaders and the presidential candidates, John Mc. Cain and Barack Obama, it became clear that there was no congressional consensus, with Republican representatives and the ranking member of the Senate Banking Committee, Richard C.
Shelby, strongly opposing the proposal.[4. The alternative advanced by conservative House Republicans was to create a system of mortgage insurance funded by fees on those holding mortgages; as the working week ended, negotiations continued on the plan, which had grown to 1. On Thursday evening Washington Mutual, the nation's largest savings and loan, was seized by the Federal Deposit Insurance Corporation and most of its assets transferred to JPMorgan Chase.[4. Wachovia, one of the largest US banks, was reported to be in negotiations with Citigroup and other financial institutions.[4. Week of September 2.