The 2008 Global Financial Crisis
The 2008 Global Financial Crisis was the most severe economic catastrophe since the Great Depression, triggered by the collapse of the U.S. housing bubble and the proliferation of complex, opaque financial products. Beginning with the subprime mortgage crisis in 2007 and climaxing with the bankruptcy of Lehman Brothers in September 2008, the crisis spread worldwide, causing millions of job losses, bank failures, and a deep global recession that reshaped financial regulation.
Events
SEC Exempts Major Investment Banks from Net Capital Rule
In a meeting with the five largest U.S. investment banks (Goldman Sachs, Lehman Brothers, Merrill Lynch, Bear Stearns, Morgan Stanley), the SEC creates an exemption from the net capital rule, allowing these banks to take on vastly more debt. This deregulatory move enables the massive leverage that fuels the housing bubble.
U.S. Housing Prices Peak as Lending Standards Collapse
After years of above-average price increases, U.S. home prices peak. One-third of all mortgages issued in 2006 are subprime or no-documentation loans. Lenders originate mortgages with little verification of borrowers' income, packaging them into mortgage-backed securities sold worldwide. Michael Burry of Scion Capital begins betting against subprime mortgages through credit default swaps.
Major Subprime Lender Files for Bankruptcy
New Century Financial, the second-largest subprime mortgage lender in the United States, files for Chapter 11 bankruptcy after being forced to buy back billions of dollars in bad loans. Its collapse marks the first major casualty of the subprime mortgage crisis and sends shockwaves through the financial system.
Bear Stearns Bails Out Two Hedge Funds Exposed to Subprime Mortgages
Bear Stearns injects 3.2 billion into two of its hedge funds that had invested heavily in subprime mortgage-backed securities. When the funds collapse anyway, investors panic. The funds' failure signals that the problems in subprime lending are not contained but are spreading to the most prestigious financial institutions.
BNP Paribas Halts Withdrawals; Global Credit Freeze Begins
French bank BNP Paribas blocks withdrawals from three investment funds, citing a "complete evaporation of liquidity" that makes valuation impossible. The announcement triggers a global credit crunch as banks stop lending to each other. The European Central Bank and the Federal Reserve begin injecting billions into money markets.
First UK Bank Run in 150 Years; Northern Rock Collapses
After announcing it has sought emergency funding from the Bank of England, Northern Rock, a highly leveraged British mortgage lender, faces the first major bank run in Britain since 1866. Customers queue in the streets to withdraw savings. The bank is later nationalized. The run marks the crisis's arrival in Europe.
Bear Stearns Sold to JPMorgan Chase for 2 a Share
Bear Stearns, the fifth-largest U.S. investment bank, faces a liquidity crisis and is sold to JPMorgan Chase in a fire sale backed by 30 billion in Federal Reserve financing. The purchase price of 2 per share (later raised to 10) represents a stunning collapse from a peak stock price of 172. The Fed's intervention sets a precedent for future bailouts.
U.S. Government Nationalizes Fannie Mae and Freddie Mac
The federal government seizes control of Fannie Mae and Freddie Mac, which together own or guarantee half of all U.S. mortgages (5 trillion). The conservatorship is the largest government intervention in financial markets in history and aims to stabilize the housing market. The Treasury pledges up to 200 billion in support.
Lehman Brothers Files Largest Bankruptcy in U.S. History
After the government declines to rescue it, Lehman Brothers, the fourth-largest U.S. investment bank, files for Chapter 11 bankruptcy with 619 billion in debt. The collapse of the 158-year-old firm causes the Dow Jones to plummet 504 points and triggers a global stock market crash. Unlike Bear Stearns, Lehman is allowed to fail.
U.S. Government Rescues AIG with 85 Billion Loan
One day after Lehman's collapse, American International Group (AIG), the world's largest insurer, is rescued by the Federal Reserve with an 85 billion loan. AIG had sold massive amounts of credit default swaps insuring mortgage-backed securities. The bailout later grows to 182 billion, sparking public outrage over "too big to fail."
Congress Approves the Troubled Asset Relief Program
The U.S. Congress passes the Emergency Economic Stabilization Act, authorizing the Treasury Department to spend 700 billion purchasing toxic assets and bank stocks through TARP. Initially rejected by the House, the bill passes after the Dow's 778-point plunge. The program stabilizes the banking system but is deeply unpopular with the public.
Obama Signs 787 Billion Economic Stimulus Package
Newly inaugurated President Barack Obama signs the American Recovery and Reinvestment Act, a 787 billion package of tax cuts, infrastructure spending, and social benefits intended to preserve jobs and stimulate demand. U.S. unemployment reaches 10% by October 2009. Global GDP contracts by 2.1% in 2009, the first global contraction since WWII.
Dodd-Frank Wall Street Reform Signed into Law
President Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial regulatory overhaul since the Great Depression. It creates the Consumer Financial Protection Bureau, imposes stricter capital requirements on banks, regulates derivatives, and requires "too big to fail" institutions to submit to resolution planning. The crisis had destroyed 11 trillion in household wealth and cost 8.7 million U.S. jobs.