Tough economic times: How did we get here?Posted on
Concerns about the subprime mortgage crisis have been around for awhile, with many blaming high-risk loans for triggering the broader economic problems.
Heres a brief rundown of some major developments in the financial crisis:
Bear Stearns Co. is bought by JPMorgan Chase & Co. in a deal orchestrated by the government, following a sharp decline in shares and a collapse in confidence in the company.
In a bid to stabilize the troubled housing market, the government seizes control of Fannie Mae and Freddie Mac, two publicly traded companies that together hold or guarantee about half the nations mortgage loans.
Lehman Brothers puts itself up for sale after reporting a $4 billion loss and a refusal by U.S. regulators to bail out the company. Fearful of the likely fallout from a Lehman failure, Merrill Lynch & Co. arranges a deal to be bought by Bank of America Co.
Lehman Brothers later declares bankruptcy, the largest ever in the United States. After passing on buying Lehman Brothers before it files for bankruptcy, Barclays later buys the companys North American investment banking and trading operations.
The U.S. government announces an $85 billion emergency loan to rescue American International Group, saying a disorderly failure of the insurance giant could hurt the already delicate financial markets and the economy.
On Sept. 18, the Federal Reserve and several other central banks inject as much as $180 billion into money markets. The Fed also adds another $55 billion in overnight loans. The next day, the Fed says it will expand its emergency lending and let commercial banks finance purchases of asset-backed paper from money market funds. The Fed injects another $20 billion in temporary reserves into the U.S. financial system.
That same week, the Bush administration asks Congress for power to execute a $700 billion plan to buy bad debt and mortgages.
Also that week, Goldman Sachs and Morgan Stanley get approval from the Federal Reserve to transform from investment banks to bank holding companies. The change means the companies will be regulated by the Federal Reserve, and will have access to its emergency loan program.
In late September, JPMorgan Chase & Co. purchases Washington Mutual in the largest bank failure in U.S. history.
On Sept. 29, the House of Representatives rejects the $700 billion rescue bill by a 228-205 vote, leading to a 777-point drop in the Dow Jones Industrial Average.
The Senate passes an amended bailout bill Oct. 1. Two days later, the House of Representatives approves the bailout plan, which is quickly signed by President Bush.
The Dow continues to drop, sliding below 10,000 for the first time since 2004. On Oct. 9, it falls below 9,000, briefly dropping below 8,000 on Oct. 10 before rallying to close above 8,000.
On Oct. 10, antitrust regulators clear Wells Fargo to acquire Wachovia.
On Oct. 12, governments around the world take steps to rescue the global financial system. Australia and New Zealand move to calm investors by guaranteeing deposits before stock markets open in Asia, and the United Arab Emirates guarantees all deposits with local banks. At an emergency summit of the 15 European countries that use the euro, the continents major economic powers agree to offer government guarantees for troubled banks trying to raise funds and pledge that public money would be used aggressively to make sure no European bank is allowed to fail.
The Dow is up in early trading Oct. 13, and the Treasury says it plans to buy U.S. bank stocks.
This article originally appeared in the November 2008 issue.