2008 global financial crisis

From MarketsWiki
(Redirected from 2008 financial crisis)
Jump to: navigation, search
Tradeweb.jpg

In the fall of 2008, the credit crunch that began in the U.S. in late 2007 ballooned into the biggest financial crisis since the Great Depression. The crisis stemmed from the meltdown of the U.S. mortgage-backed securities market that spread to banks and financial institutions around the world early in 2008, pushing them to tighten lending standards. The crisis sent revenues and profits at global investment banks plummeting and seized up the U.S. mortgage market. The U.S. government took over the country's biggest insurance company and its largest savings and loan, and the largest investment banks either crumbled or reinvented themselves as commercial banks. The nation's largest insurance company and largest savings and loan were seized by the government.

The U.S. Congress adopted a $700 billion bailout plan to try to stem the collapse, but it spread from the U.S. to Europe and various emerging markets.[1]

However, many believed that the passage of the bailout plan [2][3] in October of 2008 and actions by the Federal Reserve to pump money into the system headed off a full-scale meltdown.[4]

Wealth Destruction

The International Monetary Fund estimated in April 2008 that the total cost of the credit crisis worldwide would eventually add up to nearly $1 trillion, with just over half that stemming from U.S. mortgage market losses.[5] At that time the finance sector had booked $232 billion in credit-related losses and writedowns.

Many media analysts blamed the genesis of the crisis on the U.S. Federal Reserve and former chairman Alan Greenspan for holding interest rates below inflation for several years before 2007 and governing with too light a regulatory hand.[6] The FBI apparently foresaw the epidemic of mortgage fraud and other crimes associated with the credit crisis but lacked the resources to head it off.[7]

The crisis led to the fall of some of the country's largest investment banks and other institutions: Lehman Brothers went bankrupt in the summer of 2008, following a U.S. Treasury takeover of the mortgage giants Fannie Mae and Freddie Mac. Following that, the Fed extended an $85 billion loan to save AIG, the country's biggest insurance company, Bank of America took over Merrill Lynch, and Washington Mutual became the largest U.S. bank to fail.

Two of the largest remaining investment banks, Goldman Sachs and Morgan Stanley, announced on Sept. 21 that they were converting themselves into regulated commercial banks.

Regulators to the rescue?

In August 2008 current Fed chairman Ben Bernanke proposed an expansion of the Federal Reserve's regulatory powers to prevent similar credit crises from recurring by focusing on "potential systemic risks and weaknesses."[8] But U.S. Treasury Secretary Henry Paulson wanted instead to deliver such powers to a separate regulator and leave the Fed in charge of finanacial stability only.

In September 2008, the U.S. government proposed a plan to end the credit crunch by spending up to $700 billion to buy distressed assets from financial institutions. Hank Paulson, the treasury secretary, and Ben Bernanke, the chairman of the Federal Reserve, argued that the bailout was necessary to avoid throwing investors into a panic. The plan was criticized by some as giving the government too much power and letting bankers off at the expense of the average taxpayer.[9]

After the financial crisis that began in 2008, the Financial Crisis Inquiry Commission (FCIC) was formed to study how fraud, regulatory lapses, monetary policy, accounting, lending practices and executive pay contributed to the U.S. financial crisis.[10] The commission's findings were to be reported to the U.S. Congress and President of the United States by Dec. 15, 2010.[11]

According to remarks made by Federal Reserve Chairman Ben Bernanke in November 2009 to an investigative panel, 12 of the 13 most important U.S. financial firms were at the brink of failure at the height of the credit crisis in 2008.[12]

In July 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act in hopes of avoiding a repeat of the financial crisis. Among the provisions of Dodd-Frank were regulation of the $400 trillion swaps market, systemic risk oversight, and enhancements to consumer protection. [13]

Resources

References

  1. Credit Crisis--the Essentials. The New York Times.
  2. Credit Crisis - Bailout Plan (TARP). The New York Times.
  3. Financial Bailout May Cost Less Than Thought. The New York Times.
  4. Credit Crisis - The Essentials. The New York Times.
  5. Credit crisis could cost nearly $1 trillion, IMF predicts. Bloomberg News.
  6. Roots of credit crisis laid at Fed's door. MarketWatch.
  7. Why Credit Crisis Spread. Los Angeles Times.
  8. The credit crisis. The Economist.
  9. "America's bail-out plan". The Economist.
  10. Nominees emerge for U.S. panel on Wall Street meltdown. Reuters.
  11. About the Commission. Financial Crisis Inquiry Commission.
  12. Bernanke says all but one major firm at risk in 2008. Reuters.
  13. Senate Passes Finance Bill. The Wall Street Journal.