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The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide
financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with Bank run#Systemic banki ...
centered in the
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners and
financial institution A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...
s that led to the 2000s United States housing bubble, exacerbated by
predatory lending Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 20 ...
for
subprime mortgages In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
and deficiencies in
regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. Fo ...
.
Cash out refinancing Cash out refinancing (in the case of real property) occurs when a loan is taken out on property already owned in an amount above the cost of transaction, payoff of existing liens, and related expenses. Strictly speaking, all refinancing of debt is ...
s had fueled an increase in consumption that could no longer be sustained when home prices declined. The first phase of the crisis was the
subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
, which began in early 2007, as
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
(MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A
liquidity crisis In financial economics, a liquidity crisis is an acute shortage of ''liquidity''. Liquidity may refer to market liquidity (the ease with which an asset can be converted into a liquid medium, e.g. cash), funding liquidity (the ease with which borrow ...
spread to global institutions by mid-2007 and climaxed with the
bankruptcy of Lehman Brothers The bankruptcy of Lehman Brothers, also known as the Crash of '08 and the Lehman Shock, on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to i ...
in September 2008, which triggered a
stock market crash A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often fol ...
and
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
s in several countries. The crisis exacerbated the
Great Recession The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009.
, a
global recession A global recession is a recession that affects many countries around the world—that is, a period of global economic slowdown or declining economic output. Definitions The International Monetary Fund defines a global recession as "a decline ...
that began in mid-2007, as well as the
United States bear market of 2007–2009 The US bear market of 2007–2009 was a 17-month bear market that lasted from October 9, 2007 to March 9, 2009, encompassing the 2008 financial crisis. The S&P 500 lost approximately 50% of its value, but the duration of this bear market was ...
. It was also a contributor to the
2008–2011 Icelandic financial crisis The Icelandic financial crisis was a major financial crisis, economic and political event in Iceland between 2008 and 2010. It involved the default (finance), default of all three of the country's major privately owned commercial banks in late 2 ...
and the
euro area crisis The euro area crisis, often also referred to as the eurozone crisis, European debt crisis, or European sovereign debt crisis, was a multi-year debt crisis and financial crisis in the European Union (EU) from 2009 until, in Greece, 2018. The ...
. During the 1990s, the
U.S. Congress The United States Congress is the legislative branch of the federal government of the United States. It is a bicameral legislature, including a lower body, the U.S. House of Representatives, and an upper body, the U.S. Senate. They both ...
had passed legislation that intended to expand
affordable housing Affordable housing is housing which is deemed affordable to those with a household income at or below the median, as rated by the national government or a local government by a recognized housing affordability index. Most of the literature on ...
through looser financing rules, and in 1999, parts of the
1933 Banking Act The Banking Act of 1933 () was a statute enacted by the United States Congress that established the Federal Deposit Insurance Corporation (FDIC) and imposed various other banking reforms. The entire law is often referred to as the Glass–Stea ...
(Glass–Steagall Act) were
repealed A repeal (O.F. ''rapel'', modern ''rappel'', from ''rapeler'', ''rappeler'', revoke, ''re'' and ''appeler'', appeal) is the removal or reversal of a law. There are two basic types of repeal; a repeal with a re-enactment is used to replace the law ...
, enabling institutions to mix low-risk operations, such as
commercial bank A commercial bank is a financial institution that accepts deposits from the public and gives loans for the purposes of consumption and investment to make a profit. It can also refer to a bank or a division of a larger bank that deals with whol ...
ing and
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...
, with higher-risk operations such as
investment banking Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by und ...
and
proprietary trading Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit ...
. As the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
("Fed") lowered the
federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an collateral (finance), uncollateralized basis ...
from 2000 to 2003, institutions increasingly targeted low-income homebuyers, largely belonging to racial minorities, with high-risk loans; this development went unattended by regulators. As interest rates rose from 2004 to 2006, the cost of
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
s rose and the demand for housing fell; in early 2007, as more U.S. subprime mortgage holders began defaulting on their repayments, lenders went bankrupt, culminating in the bankruptcy of New Century Financial in April. As demand and prices continued to fall, the
financial contagion Financial contagion refers to "the spread of market disturbances—mostly on the downside—from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows". Financial co ...
spread to global
credit markets The bond market (also debt market or credit market) is a financial market in which participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, ...
by August 2007, and
central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
s began injecting
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...
. In March 2008,
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
, the fifth largest U.S. investment bank, was sold to
JPMorgan Chase JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational financial services, finance corporation headquartered in New York City and incorporated in Delaware. It is List of largest banks in the United States, the largest ba ...
in a "
fire sale A fire sale is the sale of goods at extremely discounted prices. The term originated in reference to the sale of goods at a heavy discount due to fire damage. It may or may not be defined as a closeout, the final sale of goods to zero inventor ...
" backed by Fed financing. In response to the growing crisis, governments around the world deployed massive
bailout A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global syst ...
s of financial institutions and used
monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...
and fiscal policies to prevent an
economic collapse Economic collapse, also called economic meltdown, is any of a broad range of poor economic conditions, ranging from a severe, prolonged depression with high bankruptcy rates and high unemployment (such as the Great Depression of the 1930s), t ...
of the
global financial system The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal agent (economics), economic action that together facilitate international flows of financial capital for purposes of investme ...
. By July 2008,
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
and
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Housing and Economic Recovery Act of 2008 enabled the federal government to seize them on September 7.
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
(the fourth largest U.S. investment bank) filed for the largest bankruptcy in U.S. history on September 15, which was followed by a Fed bail-out of
American International Group American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of 2023, AIG employed 25,200 people. The company operates through three core ...
(the country's largest insurer) the next day, and the seizure of
Washington Mutual Washington Mutual, Inc. (often abbreviated to WaMu) was an American Bank holding company, savings bank holding company based in Seattle. It was the parent company of Washington Mutual Bank, which was the largest savings and loan association in ...
in the largest bank failure in U.S. history on September 25. On October 3, Congress passed the
Emergency Economic Stabilization Act The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing fi ...
, authorizing the Treasury Department to purchase
toxic assets A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and fre ...
and bank stocks through the $700 billion
Troubled Asset Relief Program The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by U.S. Presi ...
(TARP). The Fed began a program of
quantitative easing Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary polic ...
by buying treasury bonds and other assets, such as MBS, and the
American Recovery and Reinvestment Act The American Recovery and Reinvestment Act of 2009 (ARRA) (), nicknamed the Recovery Act, was a stimulus package enacted by the 111th U.S. Congress and signed into law by President Barack Obama in February 2009. Developed in response to the G ...
, signed in February 2009 by newly elected President
Barack Obama Barack Hussein Obama II (born August 4, 1961) is an American politician who was the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, he was the first African American president in American history. O ...
, included a range of measures intended to preserve existing jobs and create new ones. These initiatives combined, coupled with actions taken in other countries, ended the worst of the
Great Recession The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009.
by mid-2009. Assessments of the crisis's impact in the U.S. vary, but suggest that some 8.7 million jobs were lost, causing unemployment to rise from 5% in 2007 to a high of 10% in October 2009. The percentage of citizens living in poverty rose from 12.5% in 2007 to 15.1% in 2010. The
Dow Jones Industrial Average The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indice ...
fell by 53% between October 2007 and March 2009, and some estimates suggest that one in four households lost 75% or more of their
net worth Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Financial assets minus outstanding liabilities equal net financial assets, so net w ...
. In 2010, the
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Reces ...
was passed, overhauling financial regulations. It was opposed by many Republicans, and it was weakened by the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The
Basel III Basel III is the third of three Basel Accords, a framework that sets international standards and minimums for bank capital requirements, Stress test (financial), stress tests, liquidity regulations, and Leverage (finance), leverage, with the goa ...
capital and liquidity standards were also adopted by countries around the world.


Background

The crisis exacerbated the
Great Recession The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009.
, a
global recession A global recession is a recession that affects many countries around the world—that is, a period of global economic slowdown or declining economic output. Definitions The International Monetary Fund defines a global recession as "a decline ...
that began in mid-2007. It was also followed by the
euro area crisis The euro area crisis, often also referred to as the eurozone crisis, European debt crisis, or European sovereign debt crisis, was a multi-year debt crisis and financial crisis in the European Union (EU) from 2009 until, in Greece, 2018. The ...
, which began with the start of the
Greek government-debt crisis Greek may refer to: Anything of, from, or related to Greece, a country in Southern Europe: *Greeks, an ethnic group *Greek language, a branch of the Indo-European language family ** Proto-Greek language, the assumed last common ancestor of all kn ...
in late 2009, and the
2008–2011 Icelandic financial crisis The Icelandic financial crisis was a major financial crisis, economic and political event in Iceland between 2008 and 2010. It involved the default (finance), default of all three of the country's major privately owned commercial banks in late 2 ...
, which involved the
bank failure A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. A bank typically fails economically when the market value of its ass ...
of all three of the major banks in
Iceland Iceland is a Nordic countries, Nordic island country between the Atlantic Ocean, North Atlantic and Arctic Oceans, on the Mid-Atlantic Ridge between North America and Europe. It is culturally and politically linked with Europe and is the regi ...
and, relative to the size of its economy, was the largest economic collapse suffered by any country in history. It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy. U.S. home mortgage debt relative to
GDP Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performance o ...
increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 (~$ in ) trillion. The increase in
cash out refinancing Cash out refinancing (in the case of real property) occurs when a loan is taken out on property already owned in an amount above the cost of transaction, payoff of existing liens, and related expenses. Strictly speaking, all refinancing of debt is ...
s, as home values rose, fueled an increase in consumption that could no longer be sustained when home prices declined. Many financial institutions owned investments whose value was based on home mortgages such as
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
, or
credit derivative In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the ''credit risk''"The Economist ''Passing on the risks'' 2 November 1996 or the risk of an event of default of a corp ...
s used to insure them against failure, which declined in value significantly. The
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
estimated that large U.S. and European banks lost more than $1 trillion on
toxic asset A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and fre ...
s and from bad loans from January 2007 to September 2009. Lack of investor confidence in bank
solvency Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long- ...
and declines in credit availability led to plummeting stock and
commodity In economics, a commodity is an economic goods, good, usually a resource, that specifically has full or substantial fungibility: that is, the Market (economics), market treats instances of the good as equivalent or nearly so with no regard to w ...
prices in late 2008 and early 2009. The crisis rapidly spread into a global economic shock, resulting in several
bank failure A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. A bank typically fails economically when the market value of its ass ...
s. Economies worldwide slowed during this period since credit tightened and international trade declined. Housing markets suffered and unemployment soared, resulting in
eviction Eviction is the removal of a Tenement (law), tenant from leasehold estate, rental property by the landlord. In some jurisdictions it may also involve the removal of persons from premises that were foreclosure, foreclosed by a mortgagee (often ...
s and
foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...
s. Several businesses failed. From its peak in the second quarter of 2007 at $61.4 trillion, household wealth in the United States fell $11 trillion, to $50.4 trillion by the end of the first quarter of 2009, resulting in a decline in consumption, then a decline in business investment. In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the U.S. was 8.4%. The U.S. unemployment rate peaked at 11.0% in October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964. The economic crisis started in the U.S. but spread to the rest of the world. U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world depended on the U.S. consumer as a source of demand. Toxic securities were owned by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade. Reductions in the growth rates of
developing countries A developing country is a sovereign state with a less-developed Secondary sector of the economy, industrial base and a lower Human Development Index (HDI) relative to developed countries. However, this definition is not universally agreed upon. ...
were due to falls in trade, commodity prices, investment and
remittance A remittance is a non-commercial transfer of money by a foreign worker, a member of a diaspora community, or a citizen with familial ties abroad, for household income in their home country or homeland. Money sent home by migrants competes ...
s sent from migrant workers (example: Armenia). States with fragile political systems feared that investors from Western states would withdraw their money because of the crisis. As part of national fiscal policy response to the Great Recession, governments and central banks, including the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
, the
European Central Bank The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...
and the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
, provided then-unprecedented trillions of dollars in
bailout A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global syst ...
s and stimulus, including expansive
fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...
and
monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...
to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the integral
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of usually less than 270 days. In layperson terms, it is like an "IOU" but can be bought and sold becaus ...
markets, avoid the risk of a
deflationary spiral In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases it. ...
, and provide banks with enough funds to allow customers to make withdrawals. In effect, the central banks went from being the "
lender of last resort In public finance, a lender of last resort (LOLR) is a financial entity, generally a central bank, that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank ...
" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered the "buyer of last resort". During the fourth quarter of 2008, these central banks purchased US$2.5 (~$ in ) trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action in world history. Following a model initiated by the 2008 United Kingdom bank rescue package, the governments of European nations and the United States guaranteed the debt issued by their banks and raised the capital of their national banking systems, ultimately purchasing $1.5 trillion newly issued
preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt ins ...
in major banks. The
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
created then-significant amounts of new currency as a method to combat the
liquidity trap A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rathe ...
. Bailouts came in the form of trillions of dollars of loans, asset purchases, guarantees, and direct spending. Significant controversy accompanied the bailouts, such as in the case of the AIG bonus payments controversy, leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis.
Alistair Darling Alistair Maclean Darling, Baron Darling of Roulanish, (28 November 1953 – 30 November 2023) was a British politician who served as Chancellor of the Exchequer under prime minister Gordon Brown from 2007 to 2010. A member of the Labour Party ...
, the U.K.'s
Chancellor of the Exchequer The chancellor of the exchequer, often abbreviated to chancellor, is a senior minister of the Crown within the Government of the United Kingdom, and the head of HM Treasury, His Majesty's Treasury. As one of the four Great Offices of State, t ...
at the time of the crisis, stated in 2018 that Britain came within hours of "a breakdown of law and order" the day that
Royal Bank of Scotland The Royal Bank of Scotland Public Limited Company () is a major retail banking, retail and commercial bank in Scotland. It is one of the retail banking subsidiaries of NatWest Group, together with NatWest and Ulster Bank. The Royal Bank of Sco ...
was bailed-out. Instead of financing more domestic loans, some banks instead spent some of the stimulus money in more profitable areas such as investing in emerging markets and foreign currencies. In July 2010, the
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Reces ...
was enacted in the United States to "promote the financial stability of the United States". The
Basel III Basel III is the third of three Basel Accords, a framework that sets international standards and minimums for bank capital requirements, Stress test (financial), stress tests, liquidity regulations, and Leverage (finance), leverage, with the goa ...
capital and liquidity standards were adopted worldwide. Since the 2008 financial crisis, consumer regulators in America have more closely supervised sellers of credit cards and home mortgages in order to deter anticompetitive practices that led to the crisis. At least two major reports on the causes of the crisis were produced by the U.S. Congress: the Financial Crisis Inquiry Commission report, released January 2011, and a report by the
United States Senate Homeland Security Permanent Subcommittee on Investigations The Permanent Subcommittee on Investigations (PSI), stood up in March 1941 as the "Truman Committee," is the oldest subcommittee of the United States Senate Committee on Homeland Security and Governmental Affairs (formerly the Committee on Govern ...
entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, released April 2011. In total, 47 bankers served jail time as a result of the crisis, over half of which were from
Iceland Iceland is a Nordic countries, Nordic island country between the Atlantic Ocean, North Atlantic and Arctic Oceans, on the Mid-Atlantic Ridge between North America and Europe. It is culturally and politically linked with Europe and is the regi ...
, where the crisis was the most severe and led to the collapse of all three major Icelandic banks. In April 2012,
Geir Haarde Geir Hilmar Haarde (; born 8 April 1951) is an Icelandic politician who served as prime minister of Iceland from 15 June 2006 to 1 February 2009, and as president of the Nordic Council in 1995. Geir was chairman of the Icelandic Independence Par ...
of Iceland became the only politician to be convicted as a result of the crisis. Only one banker in the United States served jail time as a result of the crisis, Kareem Serageldin, a banker at
Credit Suisse Credit Suisse Group AG (, ) was a global Investment banking, investment bank and financial services firm founded and based in Switzerland. According to UBS, eventually Credit Suisse was to be fully integrated into UBS. While the integration ...
who was sentenced to 30 months in jail and returned $24.6 million in compensation for manipulating bond prices to hide $1 billion of losses. No individuals in the United Kingdom were convicted as a result of the crisis.
Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...
paid $550 million to settle
fraud In law, fraud is intent (law), intentional deception to deprive a victim of a legal right or to gain from a victim unlawfully or unfairly. Fraud can violate Civil law (common law), civil law (e.g., a fraud victim may sue the fraud perpetrato ...
charges after allegedly anticipating the crisis and selling toxic investments to its clients. With fewer resources to risk in
creative destruction Creative destruction (German: ''schöpferische Zerstörung'') is a concept in economics that describes a process in which new innovations replace and make obsolete older innovations. The concept is usually identified with the economist Josep ...
, the number of patent applications was flat, compared to exponential increases in patent application in prior years. Typical American families did not fare well, nor did the "wealthy-but-not-wealthiest" families just beneath the pyramid's top. However, half of the poorest families in the United States did not have wealth declines at all during the crisis because they generally did not own financial investments whose value could fluctuate. The Federal Reserve surveyed 4,000 households from 2007 to 2009, and found that the total wealth of 63% of all Americans declined in that period and 77% of the richest families had a decrease in total wealth, while only 50% of those on the bottom of the pyramid suffered a decrease.


Timeline

The following is a timeline of the major events of the financial crisis, including government responses, and the subsequent economic recovery.


Pre-2007

* May 19, 2005: Fund manager
Michael Burry Michael James Burry (; born June 19, 1971) is an American investor and hedge fund manager. He founded the hedge fund Scion Capital which now goes by the name Scion Asset Management. He is best known for being among the first investors to predic ...
closed a credit default swap against subprime mortgage bonds with
Deutsche Bank Deutsche Bank AG (, ) is a Germany, German multinational Investment banking, investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Stock Exchange. ...
valued at $60 million – the first such CDS. He projected they would become volatile within two years of the low "teaser rate" of the mortgages expiring. * 2006: After years of above-average price increases, housing prices peaked and
mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
delinquency rose, leading to the
United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...
. Due to increasingly lax underwriting standards, one-third of all mortgages in 2006 were subprime or no-documentation loans, which comprised 17% of home purchases that year. * May 2006:
JPMorgan JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational finance corporation headquartered in New York City and incorporated in Delaware. It is the largest bank in the United States, and the world's largest bank by mar ...
warned clients of housing downturn, especially sub-prime. * August 2006: The
yield curve In finance, the yield curve is a graph which depicts how the Yield to maturity, yields on debt instruments – such as bonds – vary as a function of their years remaining to Maturity (finance), maturity. Typically, the graph's horizontal ...
inverted, signaling a recession was likely within a year or two. * November 2006:
UBS UBS Group AG (stylized simply as UBS) is a multinational investment bank and financial services firm founded and based in Switzerland, with headquarters in both Zurich and Basel. It holds a strong foothold in all major financial centres as the ...
warned of "an impending crisis in the U.S. housing market".


2007 (January–August)

* February 27, 2007: Stock prices in China and the U.S. fell by the most since 2003 as reports of a decline in home prices and
durable good In economics, a durable good or a hard good or consumer durable is a good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be conside ...
s orders stoked growth fears, with
Alan Greenspan Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He worked as a private adviser and provided consulting for firms through his company, Greenspan Associates L ...
predicting a recession. Due to increased delinquency rates in
subprime lending In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
,
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.New Century, an American
real estate investment trust A real estate investment trust (REIT, pronounced "reet") is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of real estate, including office and apartment buildings, studios, warehouses, hos ...
specializing in
subprime lending In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
and
securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...
, filed for
Chapter 11 bankruptcy protection Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wh ...
. This propagated the
subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
. * June 20, 2007: After receiving
margin call ''Margin Call'' is a 2011 American drama film written and directed by J. C. Chandor in his feature directorial debut. The principal story takes place over a 24-hour period at a large Wall Street investment bank during the initial stages of the ...
s,
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
bailed out two of its hedge funds with $20 billion of exposure to
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...
s including subprime mortgages. * July 19, 2007: The Dow Jones Industrial Average (DJIA) closed above 14,000 for the first time, at 14,000.41. * July 30, 2007:
IKB Deutsche Industriebank IKB Deutsche Industriebank AG (FWB: IKBG) is a bank headquartered in Düsseldorf, Germany. It was established in 1924 under the name Bank für Industrie-Obligationen (). IKB supports medium-sized enterprises in Germany and Europe with loans, risk ...
, the first banking casualty of the crisis, announces its bailout by German public financial institution KfW. * July 31, 2007:
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
liquidated the two hedge funds. * August 6, 2007: American Home Mortgage filed bankruptcy. * August 9, 2007:
BNP Paribas BNP Paribas (; sometimes referred to as BNPP or BNP) is a French multinational universal bank and financial services holding company headquartered in Paris. It was founded in 2000 from the merger of two of France's foremost financial instituti ...
blocked withdrawals from three of its
hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
s with a total of $2.2 billion in
assets under management In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institutio ...
, due to "a complete evaporation of liquidity", making valuation of the funds impossible – a clear sign that banks were refusing to do business with each other. * August 16, 2007: The DJIA closes at 12,945.78 after falling 12 out of the previous 20 trading days following its peak. It had fallen 1,164.63 or 8.3%.


2007 (September–December)

* September 14, 2007:
Northern Rock Northern Rock, formerly the Northern Rock Building Society, was a British bank. Based at Regent Centre in Newcastle upon Tyne, United Kingdom, Northern Rock was originally a building society. It demutualised and became Northern Rock bank in ...
, a medium-sized and highly
leveraged In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment. Financial leverage is named after a lever in physics, which amplifies a small input force into a greater output force. Financial leverag ...
British bank, received support from the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
. This led to investor panic and a
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
. * September 18, 2007: The
Federal Open Market Committee The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System (the Fed) that is charged under United States law with overseeing the nation's open market operations (e.g., the Fed's buying and selling of United Stat ...
began reducing the
federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an collateral (finance), uncollateralized basis ...
from its peak of 5.25% in response to worries about liquidity and confidence. * September 28, 2007: NetBank suffered from
bank failure A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. A bank typically fails economically when the market value of its ass ...
and filed bankruptcy due to exposure to home loans. * October 9, 2007: The DJIA hit its peak closing price of 14,164.53. * October 15, 2007:
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
,
Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...
, and
JPMorgan Chase JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational financial services, finance corporation headquartered in New York City and incorporated in Delaware. It is List of largest banks in the United States, the largest ba ...
announced plans for the $80 billion Master Liquidity Enhancement Conduit to provide liquidity to
structured investment vehicle A structured investment vehicle (SIV) is a non-bank financial institution established to earn a credit spread between the longer-term assets held in its portfolio and the shorter-term liabilities it issues. They are simple credit spread lenders ...
s. The plan was abandoned in December. * November 26, 2007: US markets enter a correction as worries about the financial sector continued to mount. * December 2007: Unemployment in the US hit 5%. * December 12, 2007: The
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
instituted the Term auction facility to supply short-term credit to banks with sub-prime mortgages. * December 17, 2007: Delta Financial Corporation filed bankruptcy after failing to securitize subprime loans. * December 19, 2007: the
Standard and Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is cons ...
rating agency downgrades the ratings of many monoline insurers which pay out bonds that fail. * December 31, 2007: Despite volatility through the last part of the year, markets close above where they started the year, with the DJIA closing at 13,264.82, up 6.4% for the year.


2008 (January–August)

* January 11, 2008:
Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...
agreed to buy Countrywide Financial for $4 billion in stock. * January 18, 2008: Stock markets fell to a yearly low as the credit rating of Ambac, a bond insurance company, was downgraded. Meanwhile, an increase in the amount of withdrawals causes Scottish Equitable to implement up to 12 month delays on people wanting to withdraw money. * January 21, 2008: As US markets were closed for
Martin Luther King Jr. Day Martin Luther King Jr. Day (officially Birthday of Martin Luther King Jr., and often referred to shorthand as MLK Day) is a federal holiday in the United States observed on the third Monday of January each year. King was the chief spokespers ...
, the
FTSE 100 Index The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" , is the United Kingdom's best-known stock market index of the 100 most highly capitalised blue chips listed on ...
in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...
tumbled 323.5 points or 5.5% in its largest crash since the
September 11 attacks The September 11 attacks, also known as 9/11, were four coordinated Islamist terrorist suicide attacks by al-Qaeda against the United States in 2001. Nineteen terrorists hijacked four commercial airliners, crashing the first two into ...
. * January 22, 2008: The US Federal Reserve cut interest rates by 0.75% to stimulate the economy, the largest drop in 25 years and the first emergency cut since 2001. * January 2008: U.S. stocks had the worst January since 2000 over concerns about the exposure of companies that issue bond insurance. * February 13, 2008: The Economic Stimulus Act of 2008 was enacted, which included a tax rebate. * February 22, 2008: The
nationalisation of Northern Rock In 2008 the Northern Rock bank was nationalised by the British government, due to financial problems caused by the subprime mortgage crisis. In 2010 the bank was split into two parts (Northern Rock (Asset Management), assets and banking) to aid t ...
was completed. * March 5, 2008:
The Carlyle Group The Carlyle Group Inc. is an American multinational company with operations in private equity, alternative asset management and financial services. As of 2023, the company had $426 billion of assets under management. Carlyle specializes in ...
received margin calls on its mortgage bond fund. * March 17, 2008:
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
, with $46 billion of
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
assets that had not been written down and $10 trillion in total assets, faced bankruptcy; instead, in its first emergency meeting in 30 years, the Federal Reserve agreed to guarantee its bad loans to facilitate its acquisition by
JPMorgan Chase JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational financial services, finance corporation headquartered in New York City and incorporated in Delaware. It is List of largest banks in the United States, the largest ba ...
for $2/share. A week earlier, the stock was trading at $60/share and a year earlier it traded for $178/share. The buyout price was increased to $10/share the following week. * March 18, 2008: In a contentious meeting, the Federal Reserve cut the
federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an collateral (finance), uncollateralized basis ...
by 75 basis points, its 6th cut in 6 months. It also allowed
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
&
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.U.S. dollar weakened and commodity prices soared. * Late June 2008: Despite the U.S. stock market falling to a 20% drop off its highs, commodity-related stocks soared as oil traded above $140/barrel for the first time and steel prices rose above $1,000 per ton. Worries about
inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
combined with strong demand from China encouraged people to invest in
commodities In economics, a commodity is an economic good, usually a resource, that specifically has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Th ...
during the
2000s commodities boom The 2000s commodities boom, commodities super cycle or China boom was the rise of many physical commodity prices (such as those of food, oil, metals, chemicals and fuels) during the early 21st century (2000–2014), following the Great Commoditie ...
. * July 11, 2008: IndyMac failed. Oil prices peaked at $147.50 * July 30, 2008: The Housing and Economic Recovery Act of 2008 was enacted. * August 2008: Unemployment hit 6% in the US.


2008 (September)

* September 7, 2008: The
Federal takeover of Fannie Mae and Freddie Mac In September 2008, the Federal Housing Finance Agency (FHFA) announced that it would take over the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both government-sponsored enter ...
was implemented. * September 15, 2008: After the Federal Reserve declined to guarantee its loans as it did for Bear Stearns, the
Bankruptcy of Lehman Brothers The bankruptcy of Lehman Brothers, also known as the Crash of '08 and the Lehman Shock, on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to i ...
led to a 504.48-point (4.42%) drop in the DJIA, its worst decline in seven years. To avoid bankruptcy,
Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...
was acquired by
Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...
for $50 billion in a transaction facilitated by the government. Lehman had been in talks to be sold to either
Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...
or
Barclays Barclays PLC (, occasionally ) is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services ...
but neither bank wanted to acquire the entire company. * September 16, 2008: The
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
took over
American International Group American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of 2023, AIG employed 25,200 people. The company operates through three core ...
with $85 billion in debt and equity funding. The Reserve Primary Fund " broke the buck" as a result of its exposure to
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
securities. * September 17, 2008: Investors withdrew $144 billion from U.S.
money market fund A money market fund (also called a money market mutual fund) is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hig ...
s, the equivalent of a
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
on
money market fund A money market fund (also called a money market mutual fund) is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hig ...
s, which frequently invest in
commercial paper Commercial paper, in the global financial market, is an Unsecured debt, unsecured promissory note with a fixed Maturity (finance), maturity of usually less than 270 days. In layperson terms, it is like an "IOU" but can be bought and sold becaus ...
issued by corporations to fund their operations and payrolls, causing the short-term lending market to freeze. The withdrawal compared to $7.1 billion in withdrawals the week prior. This interrupted the ability of corporations to rollover their short-term debt. The U.S. government extended insurance for money market accounts analogous to bank
deposit insurance Deposit insurance, deposit protection or deposit guarantee is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance or deposit ...
via a temporary guarantee and with Federal Reserve programs to purchase commercial paper. * September 18, 2008: In a dramatic meeting,
United States Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
Henry Paulson Henry "Hank" Merritt Paulson Jr. (born March 28, 1946) is an American investment banker and financier who served as the 74th United States secretary of the treasury from 2006 to 2009. Prior to his role in the Department of the Treasury, Paulson ...
and
Chair of the Federal Reserve The chair of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Federal Reserve Board of Governors, Board of Governors of the Federal Reserve System. The chairman p ...
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Federal Reserve, he was appointed a distinguished fellow at the Brookings Insti ...
met with
Speaker of the United States House of Representatives The speaker of the United States House of Representatives, commonly known as the speaker of the House or House speaker, is the Speaker (politics), presiding officer of the United States House of Representatives, the lower chamber of the United ...
Nancy Pelosi Nancy Patricia Pelosi ( ; ; born March 26, 1940) is an American politician who was the List of Speakers of the United States House of Representatives, 52nd speaker of the United States House of Representatives, serving from 2007 to 2011 an ...
and warned that the credit markets were close to a complete meltdown. Bernanke requested a $700 billion fund to acquire toxic mortgages and reportedly told them: "If we don't do this, we may not have an economy on Monday". * September 19, 2008: The Federal Reserve created the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility to temporarily insure money market funds and allow the credit markets to continue operating. * September 20, 2008: Paulson requested the U.S. Congress authorize a $700 billion fund to acquire toxic mortgages, telling Congress "If it doesn't pass, then heaven help us all". * September 21, 2008:
Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...
and
Morgan Stanley Morgan Stanley is an American multinational investment bank and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in 42 countries and more than 80,000 employees, the firm's clients in ...
converted from
investment banks Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by und ...
to
bank holding companies A bank holding company is a Holding company, company that controls one or more banks, but does not necessarily engage in banking itself. The Compound (linguistics), compound bancorp (''banc''/''bank'' + ''corporation, corp
ration Rationing is the controlled distribution (marketing), distribution of scarcity, scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resourc ...
') or banco ...
to increase their protection by the Federal Reserve. * September 22, 2008:
MUFG Bank is a Japanese bank and the core banking subsidiary of the Mitsubishi UFJ Financial Group (MUFG). It was established on January 1, 2006 through the merger of the and , two major banking groups that themselves were the product of recent banking ...
acquired 20% of
Morgan Stanley Morgan Stanley is an American multinational investment bank and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in 42 countries and more than 80,000 employees, the firm's clients in ...
. * September 23, 2008:
Berkshire Hathaway Berkshire Hathaway Inc. () is an American multinational conglomerate holding company headquartered in Omaha, Nebraska. Originally a textile manufacturer, the company transitioned into a conglomerate starting in 1965 under the management of c ...
made a $5 billion investment in
Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...
. * September 26, 2008:
Washington Mutual Washington Mutual, Inc. (often abbreviated to WaMu) was an American Bank holding company, savings bank holding company based in Seattle. It was the parent company of Washington Mutual Bank, which was the largest savings and loan association in ...
went bankrupt and was seized by the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is a State-owned enterprises of the United States, United States government corporation supplying deposit insurance to depositors in American commercial banks and savings banks. The FDIC was cr ...
after a
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
in which panicked depositors withdrew $16.7 billion in 10 days. * September 29, 2008: By a vote of 225–208, with most Democrats in support and Republicans against, the House of Representatives rejected the
Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing fi ...
, which included the $700 billion
Troubled Asset Relief Program The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by U.S. Presi ...
. In response, the DJIA dropped 777.68 points, or 6.98%, then the largest point drop in history. The S&P 500 Index fell 8.8% and the Nasdaq Composite fell 9.1%. Several stock market indices worldwide fell 10%. Gold prices soared to $900/ounce. The Federal Reserve doubled its credit swaps with foreign central banks as they all needed to provide liquidity.
Wachovia Wachovia was a diversified financial services company based in Charlotte, North Carolina. Before its acquisition by Wells Fargo and Company in 2008, Wachovia was the fourth-largest bank holding company in the United States, based on total asset ...
reached a deal to sell itself to Citigroup; however, the deal would have made shares worthless and required government funding. * September 30, 2008: President
George W. Bush George Walker Bush (born July 6, 1946) is an American politician and businessman who was the 43rd president of the United States from 2001 to 2009. A member of the Bush family and the Republican Party (United States), Republican Party, he i ...
addressed the country, saying "Congress must act. ... Our economy is depending on decisive action from the government. The sooner we address the problem, the sooner we can get back on the path of growth and job creation". The DJIA rebounded 4.7%.


2008 (October)

* October 1, 2008: The U.S. Senate passed the
Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing fi ...
. * October 2, 2008: Stock market indices fell 4% as investors were nervous ahead of a vote in the U.S. House of Representatives on the
Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing fi ...
. * October 3, 2008: The House of Representatives passed the
Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008, also known as the "bank bailout of 2008" or the "Wall Street bailout", was a United States federal law enacted during the Great Recession, which created federal programs to "bail out" failing fi ...
and the $700 billion Troubled Asset Relief Program. Bush signed the legislation that same day. Wachovia reached a deal to be acquired by
Wells Fargo Wells Fargo & Company is an American multinational financial services company with a significant global presence. The company operates in 35 countries and serves over 70 million customers worldwide. It is a systemically important fi ...
in a deal that did not require government funding. * October 6–10, 2008: From October 6–10, 2008, the Dow Jones Industrial Average (DJIA) closed lower in all five sessions. Volume levels were record-breaking. The DJIA fell 1,874.19 points, or 18.2%, in its worst weekly decline ever on both a points and percentage basis. The S&P 500 fell more than 20%. * October 7, 2008: In the U.S., per the Emergency Economic Stabilization Act of 2008, the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is a State-owned enterprises of the United States, United States government corporation supplying deposit insurance to depositors in American commercial banks and savings banks. The FDIC was cr ...
increased deposit insurance coverage to $250,000 per depositor. * October 8, 2008: The Indonesian stock market halted trading after a 10% drop in one day. Global central banks held emergency meetings and coordinated interest rate cuts before the US stock markets opened. * October 11, 2008: The head of the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
(IMF) warned that the world financial system was teetering on the "brink of systemic meltdown". * October 14, 2008: Having been suspended for three successive trading days (October 9, 10 and 13), the Icelandic stock market reopened on October 14, with the main index, the
OMX Iceland 15 The OMX Iceland 15 (OMXI15, formerly OMXI10, OMXI8 and OMXI6) is a stock market index for the largest and most traded stocks on the Nasdaq Iceland stock exchange. It is a price return and capitalization-weighted index. The base date for the index ...
, closing at 678.4, which was about 77% lower than the 3,004.6 at the close on October 8, after the value of the three big banks, which had formed 73.2% of the value of the OMX Iceland 15, had been set to zero, leading to the
2008–2011 Icelandic financial crisis The Icelandic financial crisis was a major financial crisis, economic and political event in Iceland between 2008 and 2010. It involved the default (finance), default of all three of the country's major privately owned commercial banks in late 2 ...
. The
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is a State-owned enterprises of the United States, United States government corporation supplying deposit insurance to depositors in American commercial banks and savings banks. The FDIC was cr ...
created the Temporary Liquidity Guarantee Program to guarantee the senior debt of all FDIC-insured institutions through June 30, 2009. * October 16, 2008: A rescue plan was unveiled for Swiss banks
UBS AG UBS Group AG (stylized simply as UBS) is a multinational Investment banking, investment bank and financial services firm founded and based in Switzerland, with headquarters in both Zurich and Basel. It holds a strong foothold in all major fina ...
and
Credit Suisse Credit Suisse Group AG (, ) was a global Investment banking, investment bank and financial services firm founded and based in Switzerland. According to UBS, eventually Credit Suisse was to be fully integrated into UBS. While the integration ...
. * October 24, 2008: Many of the world's stock exchanges experienced the worst declines in their history, with drops of around 10% in most indices. In the U.S., the DJIA fell 3.6%, although not as much as other markets. The
United States dollar The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, currency code: USD) is the official currency of the United States and International use of the U.S. dollar, several other countries. The Coinage Act of 1792 introdu ...
and
Japanese yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro. Th ...
and the
Swiss franc The Swiss franc, or simply the franc, is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) iss ...
soared against other major currencies, particularly the
British pound Sterling (Currency symbol, symbol: Pound sign, £; ISO 4217, currency code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of account, unit of sterling, and the word ''Pound (cu ...
and
Canadian dollar The Canadian dollar (currency symbol, symbol: $; ISO 4217, code: CAD; ) is the currency of Canada. It is abbreviated with the dollar sign $. There is no standard disambiguating form, but the abbreviations Can$, CA$ and C$ are frequently used f ...
, as world investors sought safe havens. A
currency crisis A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated deb ...
developed, with investors transferring vast capital resources into stronger currencies, leading many governments of emerging economies to seek aid from the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
. Later that day, the deputy governor of the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
, Charlie Bean, suggested that "This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history". In a transaction pushed by regulators,
PNC Financial Services The PNC Financial Services Group, Inc. is an American bank holding company and financial services corporation based in Pittsburgh, Pennsylvania. Its banking subsidiary, PNC Bank, operates in 27 states and the District of Columbia, with 2,629 ...
agreed to acquire
National City Corp. National City Corporation was a regional bank holding company based in Cleveland, Ohio, founded in 1845; it was once one of the ten largest banks in America in terms of deposits, mortgages and home equity lines of credit. Subsidiary National Ci ...


2008 (November–December)

* November 6, 2008: The IMF predicted a worldwide recession of −0.3% for 2009. On the same day, the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
and the
European Central Bank The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...
, respectively, reduced their interest rates from 4.5% to 3%, and from 3.75% to 3.25%. * November 10, 2008:
American Express American Express Company or Amex is an American bank holding company and multinational financial services corporation that specializes in payment card industry, payment cards. It is headquartered at 200 Vesey Street, also known as American Expr ...
converted to a
bank holding company A bank holding company is a company that controls one or more banks, but does not necessarily engage in banking itself. The compound bancorp (''banc''/''bank'' + '' corp ration') or bancorporation is often used to refer to such companies as w ...
. * November 20, 2008: Iceland obtained an emergency loan from the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
after the failure of banks in Iceland resulted in a devaluation of the
Icelandic króna The króna () or krona (sometimes called Icelandic crown; currency sign, sign: kr; ISO 4217, code: ISK) is the currency of Iceland. One króna was formerly divided into 100 eyrir (plural "aurar"). Name Like the other Nordic countries, Nordic ...
and threatened the government with bankruptcy. * November 25, 2008: The Term Asset-Backed Securities Loan Facility was announced. * November 29, 2008: Economist
Dean Baker Dean Baker (born July 13, 1958) is an American macroeconomist who co-founded the Center for Economic and Policy Research (CEPR) with Mark Weisbrot. Baker has been credited as one of the first economists to have identified the 2007–08 United S ...
observed: * December 1, 2008: The NBER announced the US was in a recession and had been since December 2007. The Dow tumbled 679.95 points or 7.8% on the news. * December 6, 2008: The
2008 Greek riots The 2008 Greek riots started on 6 December 2008, when Alexandros Grigoropoulos (), a 15-year-old Greek student, was killed by a special officer in Exarcheia district of central Athens. The killing of the young student by police resulted in larg ...
began, sparked in part by economic conditions in the country. * December 16, 2008: The federal funds rate was lowered to 0%. * December 20, 2008: Financing under the
Troubled Asset Relief Program The Troubled Asset Relief Program (TARP) is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by U.S. Presi ...
was made available to
General Motors General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. The company is most known for owning and manufacturing f ...
and
Chrysler FCA US, LLC, Trade name, doing business as Stellantis North America and known historically as Chrysler ( ), is one of the "Big Three (automobile manufacturers), Big Three" automobile manufacturers in the United States, headquartered in Auburn H ...
.


2009

* January 6, 2009: Citi claimed that Singapore would experience "the most severe recession in Singapore's history" in 2009. In the end the economy grew in 2009 by 0.1% and in 2010 by 14.5%. * January 20–26, 2009: The
2009 Icelandic financial crisis protests The 2009–2011 Icelandic financial crisis protests, also referred to as the Kitchenware, Kitchen Implement or Pots and Pans Revolution ( Icelandic: ''Búsáhaldabyltingin''), occurred after the 2008–2012 Icelandic financial crisis. There had ...
intensified and the Icelandic government collapsed. * February 13, 2009: Congress approved the
American Recovery and Reinvestment Act of 2009 The American Recovery and Reinvestment Act of 2009 (ARRA) (), nicknamed the Recovery Act, was a Stimulus (economics), stimulus package enacted by the 111th U.S. Congress and signed into law by President Barack Obama in February 2009. Developed ...
, a $787 billion economic stimulus package. President Barack Obama signed it February 17. * February 20, 2009: The DJIA closed at a 6-year low amidst worries that the largest banks in the United States would have to be
nationalized Nationalization (nationalisation in British English) is the process of transforming privately owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization contrasts with priv ...
. * February 27, 2009: The
DJIA The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The DJIA is one of the oldest and most commonly followed equity indice ...
closed its lowest value since 1997 as the U.S. government increased its stake in
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
to 36%, raising further fears of nationalization and a report showed that GDP shrank at the sharpest pace in 26 years. * Early March 2009: The drop in stock prices was compared to that of the
Great Depression The Great Depression was a severe global economic downturn from 1929 to 1939. The period was characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and ...
. * March 3, 2009: President Obama stated that "Buying stocks is a potentially good deal if you've got a long-term perspective on it". * March 6, 2009: The Dow Jones hit its lowest level of 6,469.95, a drop of 54% from its peak of 14,164 on October 9, 2007, over a span of 17 months, before beginning to recover. * March 10, 2009: Shares of
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
rose 38% after the CEO said that the company was profitable in the first two months of the year and expressed optimism about its capital position going forward. Major stock market indices rose 5–7%, marking the bottom of the stock market decline. * March 12, 2009: Stock market indices in the U.S. rose another 4% after
Bank of America The Bank of America Corporation (Bank of America) (often abbreviated BofA or BoA) is an American multinational investment banking, investment bank and financial services holding company headquartered at the Bank of America Corporate Center in ...
said it was profitable in January and February and would likely not need more government funding.
Bernie Madoff Bernard Lawrence Madoff ( ; April 29, 1938April 14, 2021) was an American financial criminal and financier who was the admitted mastermind of the largest known Ponzi scheme in history, worth an estimated $65 billion. He was at one time ...
was convicted. * First quarter of 2009: For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico. * April 2, 2009: Unrest over
economic policy ''Economic Policy'' is a quarterly peer-reviewed academic journal published by Oxford University Press, Oxford Academic on behalf of the Centre for Economic Policy Research, the Center for Economic Studies (University of Munich), and the Paris Scho ...
and bonuses paid to bankers resulted in the 2009 G20 London summit protests. * April 10, 2009: ''
Time Time is the continuous progression of existence that occurs in an apparently irreversible process, irreversible succession from the past, through the present, and into the future. It is a component quantity of various measurements used to sequ ...
'' magazine declared "More Quickly Than It Began, The Banking Crisis Is Over". * April 29, 2009: The Federal Reserve projected GDP growth of 2.5–3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation rates around 1–2%. * May 1, 2009: People protested economic conditions globally during the 2009 May Day protests. * May 20, 2009: President Obama signed the Fraud Enforcement and Recovery Act of 2009. * June 2009: The
National Bureau of Economic Research The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic co ...
(NBER) declared June 2009 as the end date of the U.S. recession. The
Federal Open Market Committee The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System (the Fed) that is charged under United States law with overseeing the nation's open market operations (e.g., the Fed's buying and selling of United Stat ...
release in June 2009 stated: * June 17, 2009:
Barack Obama Barack Hussein Obama II (born August 4, 1961) is an American politician who was the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, he was the first African American president in American history. O ...
and key advisers introduced a series of regulatory proposals that addressed
consumer protection Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent business ...
,
executive pay Executive compensation is composed of both the financial compensation (executive pay) and other non-financial benefits received by an executive from their employing firm in return for their service. It is typically a mixture of fixed salary, varia ...
, bank capital requirements, expanded regulation of the
shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2 ...
and derivatives, and enhanced authority for the Federal Reserve to safely wind down systemically important institutions. * December 11, 2009:
United States House of Representatives The United States House of Representatives is a chamber of the Bicameralism, bicameral United States Congress; it is the lower house, with the U.S. Senate being the upper house. Together, the House and Senate have the authority under Artic ...
passed bill H.R. 4173, a precursor to what became the
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Reces ...
.


2010

* January 22, 2010: President Obama introduced "The
Volcker Rule The Volcker Rule is sectioof the Dodd–Frank Wall Street Reform and Consumer Protection Act (). The rule was originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker in 2010 to restrict United S ...
" limiting the ability of banks to engage in
proprietary trading Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit ...
, named after
Paul Volcker Paul Adolph Volcker Jr. (September 5, 1927 – December 8, 2019) was an American economist who served as the 12th chair of the Federal Reserve, chairman of the Federal Reserve from 1979 to 1987. During his tenure as chairman, Volcker was widely ...
, who publicly argued for the proposed changes. Obama also proposed a Financial Crisis Responsibility Fee on large banks. * January 27, 2010: President Obama declared on "the markets are now stabilized, and we've recovered most of the money we spent on the banks". * First quarter 2010: Delinquency rates in the United States peaked at 11.54%. * April 15, 2010: U.S. Senate introduced bill S.3217, Restoring American Financial Stability Act of 2010. * May 2010: The U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule against proprietary trading was not part of the legislation. * July 21, 2010:
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Reces ...
enacted. * September 12, 2010: European regulators introduced
Basel III Basel III is the third of three Basel Accords, a framework that sets international standards and minimums for bank capital requirements, Stress test (financial), stress tests, liquidity regulations, and Leverage (finance), leverage, with the goa ...
regulations for banks, which increased capital ratios, limits on leverage, narrowed the definition of capital to exclude subordinated debt, limited counter-party risk, and added liquidity requirements. Critics argued that Basel III didn't address the problem of faulty risk-weightings. Major banks suffered losses from AAA-rated created by
financial engineering Financial engineering is a multidisciplinary field involving financial theory, methods of engineering, tools of mathematics and the practice of programming. It has also been defined as the application of technical methods, especially from mathe ...
(which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis. Johan Norberg argued that regulations (Basel III among others) have indeed led to excessive lending to risky governments (see
Euro area crisis The euro area crisis, often also referred to as the eurozone crisis, European debt crisis, or European sovereign debt crisis, was a multi-year debt crisis and financial crisis in the European Union (EU) from 2009 until, in Greece, 2018. The ...
) and the
European Central Bank The European Central Bank (ECB) is the central component of the Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's Big Four (banking)#International ...
pursues even more lending as the solution. * November 3, 2010: To improve economic growth, the Federal Reserve announced another round of
quantitative easing Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary polic ...
, dubbed QE2, which included the purchase of $600 billion in long-term Treasuries over the following eight months.


Post-2010

* March 2011: Two years after the
nadir The nadir is the direction pointing directly ''below'' a particular location; that is, it is one of two vertical directions at a specified location, orthogonal to a horizontal flat surface. The direction opposite of the nadir is the zenith. Et ...
of the crisis, many stock market indices were 75% above their lows set in March 2009. Nevertheless, the lack of fundamental changes in banking and financial markets worried many market participants, including the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
. * 2011: Median household wealth fell 35% in the U.S., from $106,591 to $68,839 between 2005 and 2011. * May 2012: The
Manhattan District Attorney The New York County District Attorney, also known as the Manhattan District Attorney, is the elected district attorney for New York County, New York. The office is responsible for the prosecution of violations of New York state laws (federal la ...
indicted Abacus Federal Savings Bank and 19 employees for selling fraudulent mortgages to
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
. The bank was acquitted in 2015. Abacus was the only bank prosecuted for misbehavior that precipitated the crisis. * July 26, 2012: During the
European debt crisis The euro area crisis, often also referred to as the eurozone crisis, European debt crisis, or European sovereign debt crisis, was a multi-year debt crisis and financial crisis in the European Union (EU) from 2009 until, in Greece, 2018. The e ...
,
President of the European Central Bank The president of the European Central Bank is the head of the European Central Bank (ECB), the main institution responsible for the management of the euro and monetary policy in the Eurozone of the European Union (EU) The current president of ...
Mario Draghi Mario Draghi (; born 3 September 1947) is an Italian politician, economist, academic, banker, statesman, and civil servant, who served as the prime minister of Italy from 13 February 2021 to 22 October 2022. Prior to his appointment as prime mi ...
announced that "The ECB is ready to do whatever it takes to preserve the euro". * August 2012: In the United States, many homeowners still faced foreclosure and could not refinance or modify their mortgages. Foreclosure rates remained high. * September 13, 2012: To improve lower interest rates, support mortgage markets, and make financial conditions more accommodative, the Federal Reserve announced another round of
quantitative easing Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary polic ...
, dubbed QE3, which included the purchase of $40 billion in long-term Treasuries each month. * 2014: A report showed that the distribution of household incomes in the United States became more unequal during the post-2008 economic recovery, a first for the United States but in line with the trend over the last ten economic recoveries since 1949.
Income inequality in the United States Income inequality has fluctuated considerably in the United States since measurements began around 1915, moving in an arc between peaks in the 1920s and 2000s, with a lower level of inequality from approximately 1950-1980 (a period named the ...
grew from 2005 to 2012 in more than 2 out of 3 metropolitan areas. * June 2015: A study commissioned by the
ACLU The American Civil Liberties Union (ACLU) is an American nonprofit civil rights organization founded in 1920. ACLU affiliates are active in all 50 states, Washington, D.C., and Puerto Rico. The budget of the ACLU in 2024 was $383 million. ...
found that white home-owning households recovered from the financial crisis faster than black home-owning households, widening the racial wealth gap in the U.S. * 2017: Per the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
, from 2007 to 2017, "advanced" economies accounted for only 26.5% of global
GDP Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performance o ...
( PPP) growth while emerging and developing economies accounted for 73.5% of global GDP (PPP) growth. * August 2023:
UBS UBS Group AG (stylized simply as UBS) is a multinational investment bank and financial services firm founded and based in Switzerland, with headquarters in both Zurich and Basel. It holds a strong foothold in all major financial centres as the ...
reaches an agreement with the
United States Department of Justice The United States Department of Justice (DOJ), also known as the Justice Department, is a United States federal executive departments, federal executive department of the U.S. government that oversees the domestic enforcement of Law of the Unite ...
to pay a combined $1.435 billion in civil penalties to settle a legacy matter from 2006–2007 related to the issuance, underwriting and sale of residential mortgage-backed securities. In the table, the names of emerging and developing economies are shown in boldface type, while the names of developed economies are in Roman (regular) type.


Federal actions towards the crisis

The expansion of central bank lending in response to the crisis was not confined to the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
's provision of aid to individual financial institutions. The Federal Reserve has also conducted several innovative lending programs to improve liquidity and strengthen different financial institutions and markets, such as
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
. In this case, the major problem in the market is the lack of free cash reserves and flows to secure the loans. The Federal Reserve took many steps to deal with financial market liquidity worries. One of these steps was a credit line for major traders, who act as the Fed's partners in open market activities. Also, loan programs were set up to make the money market mutual funds and commercial paper market more flexible. Also, the Term Asset-Backed Securities Loan Facility (TALF) was put in place thanks to a joint effort with the US Department of the Treasury. This plan made it easier for consumers and businesses to get credit by giving Americans who owned high-quality asset-backed securities more credit. Before the crisis, the Federal Reserve's stocks of Treasury securities were sold to pay for the increase in credit. This method was meant to keep banks from trying to give out their extra savings, which could cause the federal funds rate to drop below where it was supposed to be. However, in October 2008, the Federal Reserve was granted the power to provide banks with interest payments on their surplus reserves. This created a motivation for banks to retain their reserves instead of disbursing them, thus reducing the need for the Federal Reserve to hedge its increased lending by decreases in alternative assets. Money market funds also went through runs when people lost faith in the market. To keep it from getting worse, the Fed said it would give money to mutual fund companies. Also, Department of Treasury said that it would briefly cover the assets of the fund. Both of these things helped get the fund market back to normal, which helped the commercial paper market, which most businesses use to run. The
FDIC The Federal Deposit Insurance Corporation (FDIC) is a State-owned enterprises of the United States, United States government corporation supplying deposit insurance to depositors in American commercial banks and savings banks. The FDIC was cr ...
also did several things, such as raising the insurance cap from $100,000 to $250,000, to boost customer trust. They engaged in
quantitative easing Quantitative easing (QE) is a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary polic ...
, which added more than $4 trillion to the financial system and got banks to start lending again, both to each other and to people. Many homeowners who were trying to keep their homes from going into default got housing credits. A package of policies was passed that let borrowers refinance their loans even though the value of their homes was less than what they still owed on their
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
s.


Causes

While the causes of the bubble and subsequent crash are disputed, the precipitating factor for the Financial Crisis of 2007–2008 was the bursting of the
United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...
and the subsequent
subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
, which occurred due to a high default rate and resulting foreclosures of
mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
s, particularly
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
s. Some or all of the following factors contributed to the crisis: * In its January 2011 report, the Financial Crisis Inquiry Commission (FCIC, a committee of U.S. congressmen) concluded that the financial crisis was avoidable and was caused by: ** "widespread failures in
financial regulation Financial regulation is a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest consi ...
and supervision", including the Federal Reserve's failure to stem the tide of
toxic asset A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder. Because assets are offset against liabilities and fre ...
s. ** "dramatic failures of
corporate governance Corporate governance refers to the mechanisms, processes, practices, and relations by which corporations are controlled and operated by their boards of directors, managers, shareholders, and stakeholders. Definitions "Corporate governance" may ...
and
risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...
at many systemically important
financial institutions A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...
" including too many financial firms acting recklessly and taking on too much risk. ** "a combination of excessive borrowing, risky investments, and lack of transparency" by financial institutions and by households that put the financial system on a collision course with crisis. ** ill preparation and inconsistent action by government and key policy makers lacking a full understanding of the financial system they oversaw that "added to the uncertainty and panic". ** a "systemic breakdown in accountability and ethics" at all levels. ** "collapsing mortgage-lending standards and the mortgage securitization pipeline". ** deregulation of '
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid pres ...
' derivatives, especially credit default swaps. ** "the failures of credit rating agencies" to correctly price risk. * " Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" (known as the Levin–Coburn Report) by the
United States Senate The United States Senate is a chamber of the Bicameralism, bicameral United States Congress; it is the upper house, with the United States House of Representatives, U.S. House of Representatives being the lower house. Together, the Senate and ...
concluded that the crisis was the result of "high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street". * The high delinquency and default rates by homeowners, particularly those with subprime credit, led to a rapid devaluation of mortgage-backed securities including bundled loan portfolios, derivatives and credit default swaps. As the value of these assets plummeted, buyers for these securities evaporated and banks who were heavily invested in these assets began to experience a liquidity crisis. *
Securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...
, a process in which many mortgages were bundled together and formed into new financial instruments called
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
, allowed for shifting of risk and lax underwriting standards. These bundles could be sold as (ostensibly) low-risk securities partly because they were often backed by credit default swap insurance. Because mortgage lenders could pass these mortgages (and the associated risks) on in this way, they could and did adopt loose underwriting criteria. * Lax regulation allowed
predatory lending Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 20 ...
in the private sector, especially after the federal government overrode anti-predatory state laws in 2004. * The
Community Reinvestment Act The Community Reinvestment Act (CRA, P.L. 95-128, 91 Stat. 1147, title VIII of the Housing and Community Development Act of 1977, ''et seq.'') is a United States federal law designed to encourage commercial banks and savings associations to h ...
(CRA), a 1977 U.S. federal law designed to help low- and moderate-income Americans get mortgage loans required banks to grant mortgages to higher risk families. Granted, in 2009, Federal Reserve economists found that, "only a small portion of subprime mortgage originations
elated Elation, Elate, or Elated may refer to: * Happiness * Elation (album), ''Elation'' (album), a 2012 album by Great White * ''Carnival Elation'', a cruise ship * Elate (mythology), a minor figure in Greek mythology * Elate (plant), ''Elate'' (plant) ...
to the CRA", and that "CRA-related loans appear dto perform comparably to other types of subprime loans". These findings "run counter to the contention that the CRA contributed in any substantive way to the ortgage crisis" * Reckless lending by lenders such as Bank of America's Countrywide Financial unit was increasingly incentivized and even mandated by government regulation. This may have caused
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
and
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs associated with that risk, should things go wrong. For example, when a corporation i ...
and contributed to a glut of risky lending. * Government policies that encouraged home ownership, providing easier access to loans for subprime borrowers; overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate; questionable trading practices on behalf of both buyers and sellers; compensation structures by banks and mortgage originators that prioritize short-term deal flow over long-term value creation; and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. * The 1999 Gramm-Leach-Bliley Act, which partially repealed the Glass-Steagall Act, effectively removed the separation between
investment bank Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
s and depository banks in the United States and increased speculation on the part of depository banks. *
Credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may r ...
and investors failed to accurately price the
financial risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ...
involved with
mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
-related financial products, and governments did not adjust their regulatory practices to address changes in financial markets. * Variations in the cost of borrowing. *
Fair value accounting Mark-to-market (MTM or M2M) or fair value accounting is accounting for the "fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair" ...
was issued as U.S. accounting standard
SFAS 157 In September 2006, the Financial Accounting Standards Board (FASB) of the United States issued Statement of Financial Accounting Standards 157: Fair Value Measurements), which "defines fair value, establishes a framework for measuring fair value in ...
in 2006 by the privately run
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Secur ...
(FASB)—delegated by the SEC with the task of establishing financial reporting standards. This required that tradable assets such as mortgage securities be valued according to their current market value rather than their historic cost or some future expected value. When the market for such securities became volatile and collapsed, the resulting loss of value had a major financial effect upon the institutions holding them even if they had no immediate plans to sell them. * Easy availability of credit in the US, fueled by large inflows of foreign funds after the
1998 Russian financial crisis The Russian financial crisis (also called the ruble crisis or the Russian flu) began in Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the Russian rouble, ruble and sovereign default, defau ...
and
1997 Asian financial crisis The 1997 Asian financial crisis gripped much of East Asia, East and Southeast Asia during the late 1990s. The crisis began in Thailand in July 1997 before spreading to several other countries with a ripple effect, raising fears of a worldwide eco ...
of the 1997–1998 period, led to a housing construction boom and facilitated debt-financed consumer spending. As banks began to give out more loans to potential home owners, housing prices began to rise. Lax lending standards and rising real estate prices also contributed to the real estate bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. * As part of the housing and credit booms, the number of
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
(MBS) and
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...
s (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such
financial innovation Financial innovation is the act of creating new financial instruments as well as new financial technologies, institutions, and markets. Recent financial innovations include hedge funds, private equity, weather derivatives, retail-structured pr ...
enabled institutions and investors to invest in the U.S. housing market. As housing prices declined, these investors reported significant losses. * Falling prices also resulted in homes worth less than the mortgage loans, providing borrowers with a financial incentive to enter foreclosure. Foreclosure levels were elevated until early 2014. drained significant wealth from consumers, losing up to $4.2
trillion ''Trillion'' is a number with two distinct definitions: *1,000,000,000,000, i.e. one million 1,000,000, million, or (ten to the twelfth Exponentiation, power), as defined on the long and short scales, short scale. This is now the meaning in bot ...
Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses were estimated in the trillions of U.S. dollars globally. *
Financialization Financialization (or financialisation in British English) is a term sometimes used to describe the development of financial capitalism during the period from 1980 to the present, in which debt-to-equity ratios increased, and financial service ...
– the increased use of leverage in the financial system. * Financial institutions such as investment banks and hedge funds, as well as certain, differently regulated banks, assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or losses. These losses affected the ability of financial institutions to lend, slowing economic activity. * Some critics contend that government mandates forced banks to extend loans to borrowers previously considered uncreditworthy, leading to increasingly lax underwriting standards and high mortgage approval rates. These, in turn, led to an increase in the number of homebuyers, which drove up housing prices. This appreciation in value led many homeowners to borrow against the equity in their homes as an apparent windfall, leading to over-leveraging.


Subprime lending

The relaxing of credit lending standards by investment banks and commercial banks allowed for a significant increase in
subprime lending In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
. Subprime had not become less risky; Wall Street just accepted this higher risk. Due to competition between mortgage lenders for revenue and market share, and when the supply of creditworthy borrowers was limited, mortgage lenders relaxed underwriting standards and originated riskier mortgages to less creditworthy borrowers. In the view of some analysts, the relatively conservative
government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of Credit (finance), credit to targeted sectors of the economy, to make tho ...
s (GSEs) policed mortgage originators and maintained relatively high underwriting standards prior to 2003. However, as market power shifted from securitizers to originators, and as intense competition from private securitizers undermined GSE power, mortgage standards declined and risky loans proliferated. The riskiest loans were originated in 2004–2007, the years of the most intense competition between securitizers and the lowest market share for the GSEs. The GSEs eventually relaxed their standards to try to catch up with the private banks. A contrarian view is that
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
and
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Countrywide. Depending on how "subprime" mortgages are defined, they remained below 10% of all mortgage originations until 2004, when they rose to nearly 20% and remained there through the 2005–2006 peak of the
United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...
.


Role of affordable housing programs

The majority report of the Financial Crisis Inquiry Commission, written by the six Democratic appointees, the minority report, written by three of the four Republican appointees, studies by
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
economists, and the work of several independent scholars generally contend that government
affordable housing Affordable housing is housing which is deemed affordable to those with a household income at or below the median, as rated by the national government or a local government by a recognized housing affordability index. Most of the literature on ...
policy was not the primary cause of the financial crisis. Although they concede that governmental policies had some role in causing the crisis, they contend that GSE loans performed better than loans securitized by private investment banks, and performed better than some loans originated by institutions that held loans in their own portfolios. In his dissent to the majority report of the Financial Crisis Inquiry Commission, conservative
American Enterprise Institute The American Enterprise Institute for Public Policy Research, known simply as the American Enterprise Institute (AEI), is a center-right think tank based in Washington, D.C., that researches government, politics, economics, and social welfare ...
fellow A fellow is a title and form of address for distinguished, learned, or skilled individuals in academia, medicine, research, and industry. The exact meaning of the term differs in each field. In learned society, learned or professional society, p ...
Peter J. Wallison stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by the
United States Department of Housing and Urban Development The United States Department of Housing and Urban Development (HUD) is one of the executive departments of the U.S. federal government. It administers federal housing and urban development laws. It is headed by the secretary of housing and u ...
(HUD) in the 1990s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac. Based upon information in the SEC's December 2011 securities fraud case against six former executives of Fannie and Freddie, Peter Wallison and Edward Pinto estimated that, in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion. In the early and mid-2000s, the Bush administration called numerous times for investigations into the safety and soundness of the GSEs and their swelling portfolio of subprime mortgages. On September 10, 2003, the
United States House Committee on Financial Services The United States House Committee on Financial Services, also referred to as the House Banking Committee and previously known as the Committee on Banking and Currency, is the United States congressional committee, committee of the United States ...
held a hearing, at the urging of the administration, to assess safety and soundness issues and to review a recent report by the
Office of Federal Housing Enterprise Oversight The Office of Federal Housing Enterprise Oversight (OFHEO) was an agency within the Department of Housing and Urban Development of the United States of America. It was charged with ensuring the capital adequacy and financial safety and soundness ...
(OFHEO) that had uncovered accounting discrepancies within the two entities. The hearings never resulted in new legislation or formal investigation of Fannie Mae and Freddie Mac, as many of the committee members refused to accept the report and instead rebuked OFHEO for their attempt at regulation. Some, such as Wallison, believe this was an early warning to the systemic risk that the growing market in subprime mortgages posed to the U.S. financial system that went unheeded. A 2000
United States Department of the Treasury The Department of the Treasury (USDT) is the Treasury, national treasury and finance department of the federal government of the United States. It is one of 15 current United States federal executive departments, U.S. government departments. ...
study of lending trends for 305 cities from 1993 to 1998 showed that $467 billion of mortgage lending was made by
Community Reinvestment Act The Community Reinvestment Act (CRA, P.L. 95-128, 91 Stat. 1147, title VIII of the Housing and Community Development Act of 1977, ''et seq.'') is a United States federal law designed to encourage commercial banks and savings associations to h ...
(CRA)-covered lenders into low and mid-level income (LMI) borrowers and neighborhoods, representing 10% of all U.S. mortgage lending during the period. The majority of these were prime loans. Sub-prime loans made by CRA-covered institutions constituted a 3% market share of LMI loans in 1998, but in the run-up to the crisis, fully 25% of all subprime lending occurred at CRA-covered institutions and another 25% of subprime loans had some connection with CRA. However, most sub-prime loans were not made to the LMI borrowers targeted by the CRA, especially in the years 2005–2006 leading up to the crisis, nor did it find any evidence that lending under the CRA rules increased delinquency rates or that the CRA indirectly influenced independent mortgage lenders to ramp up sub-prime lending. To other analysts the delay between CRA rule changes in 1995 and the explosion of subprime lending is not surprising, and does not exonerate the CRA. They contend that there were two, connected causes to the crisis: the relaxation of underwriting standards in 1995 and the ultra-low interest rates initiated by the Federal Reserve after the terrorist attack on September 11, 2001. Both causes had to be in place before the crisis could take place. Critics also point out that publicly announced CRA loan commitments were massive, totaling $4.5 trillion in the years between 1994 and 2007. They also argue that the Federal Reserve's classification of CRA loans as "prime" is based on the faulty and self-serving assumption that high-interest-rate loans (3 percentage points over average) equal "subprime" loans. Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in ''Portfolio'' magazine,
Michael Lewis Michael Monroe Lewis (born October 15, 1960) Gale Biography In Context. is an American author and financial journalist. He has also been a contributing editor to '' Vanity Fair'' since 2009, writing mostly on business, finance, and economics. ...
spoke with one trader who noted that "There weren't enough Americans with adcredit taking out ad loansto satisfy investors' appetite for the end product." Essentially, investment banks and hedge funds used financial innovation to enable large wagers to be made, far beyond the actual value of the underlying mortgage loans, using derivatives called credit default swaps, collateralized debt obligations and
synthetic CDO A synthetic CDO is a variation of a CDO (collateralized debt obligation) that generally uses credit default swaps and other derivatives to obtain its investment goals.Lemke, Lins and Picard, ''Mortgage-Backed Securities'', §5:16 (Thomson West, 2 ...
s. By March 2011, the FDIC had paid out $9 billion (c. $ in ) to cover losses on bad loans at 165 failed financial institutions. The Congressional Budget Office estimated, in June 2011, that the bailout to Fannie Mae and Freddie Mac exceeds $300 billion (c. $ in ) (calculated by adding the fair value deficits of the entities to the direct bailout funds at the time). Economist
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American New Keynesian economics, New Keynesian economist who is the Distinguished Professor of Economics at the CUNY Graduate Center, Graduate Center of the City University of New York. He ...
argued in January 2010 that the simultaneous growth of the residential and commercial real estate pricing bubbles and the global nature of the crisis undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA, or predatory lending were primary causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes. Countering Krugman, Wallison wrote: "It is not true that every bubble—even a large bubble—has the potential to cause a financial crisis when it deflates." Wallison notes that other developed countries had "large bubbles during the 1997–2007 period" but "the losses associated with mortgage delinquencies and defaults when these bubbles deflated were far lower than the losses suffered in the United States when the 1997–2007 ubbledeflated." According to Wallison, the reason the U.S. ''residential housing'' bubble (as opposed to other types of bubbles) led to financial crisis was that it was supported by a huge number of substandard loans—generally with low or no downpayments. Krugman's contention (that the growth of a commercial real estate bubble indicates that U.S. housing policy was not the cause of the crisis) is challenged by additional analysis. After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported (in December 2010): "We find limited evidence that substantial deterioration in CMBS ommercial mortgage-backed securitiesloan underwriting occurred prior to the crisis." Other analysts support the contention that the crisis in commercial real estate and related lending took place ''after'' the crisis in residential real estate. Business journalist Kimberly Amadeo reported: "The first signs of decline in residential real estate occurred in 2006. Three years later, commercial real estate started feeling the effects." Denice A. Gierach, a real estate attorney and CPA, wrote:


Growth of the housing bubble

Between 1998 and 2006, the price of the typical American house increased by 124%. During the 1980s and 1990s, the national median home price ranged from 2.9 to 3.1 times median household income. By contrast, this ratio increased to 4.0 in 2004, and 4.6 in 2006. This
housing bubble A housing bubble (or housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. First t ...
resulted in many homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out
second mortgage Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary Mortgage loan, mortgage. Depending on the time at which the second mortgage is originated, the loan can be structured as either a ...
s secured by the price appreciation. In a
Peabody Award The George Foster Peabody Awards (or simply Peabody Awards or the Peabodys) program, named for the American businessman and philanthropist George Foster Peabody, George Peabody, honor what are described as the most powerful, enlightening, and in ...
-winning program,
NPR National Public Radio (NPR) is an American public broadcasting organization headquartered in Washington, D.C., with its NPR West headquarters in Culver City, California. It serves as a national Radio syndication, syndicator to a network of more ...
correspondents argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. This pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with products such as the
mortgage-backed security A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
and the
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...
that were assigned safe ratings by the
credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may r ...
. In effect, Wall Street connected this pool of money to the mortgage market in the US, with enormous fees accruing to those throughout the mortgage
supply chain A supply chain is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers, while supply chain management deals with the flow of goods in distri ...
, from the mortgage broker selling the loans to small banks that funded the brokers and the large investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards. The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority. Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. As prices declined, borrowers with
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
s could not refinance to avoid the higher payments associated with rising interest rates and began to default. During 2007, lenders began foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. By August 2008, approximately 9% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. After the bubble burst, Australian economist
John Quiggin John Quiggin (born 29 March 1956) is an Australian economist, a professor at the University of Queensland. He was formerly an Australian Research Council Laureate Fellow and Federation Fellow and a member of the board of the Climate Change A ...
wrote, "And, unlike the Great Depression, this crisis was entirely the product of financial markets. There was nothing like the postwar turmoil of the 1920s, the struggles over gold convertibility and reparations, or the Smoot-Hawley tariff, all of which have shared the blame for the Great Depression." Instead, Quiggin lays the blame for the 2008 near-meltdown on financial markets, on political decisions to lightly regulate them, and on rating agencies which had self-interested incentives to give good ratings.


Easy credit conditions

Lower interest rates encouraged borrowing. From 2000 to 2003, the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
lowered the
federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an collateral (finance), uncollateralized basis ...
target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the
dot-com bubble The dot-com bubble (or dot-com boom) was a stock market bubble that ballooned during the late-1990s and peaked on Friday, March 10, 2000. This period of market growth coincided with the widespread adoption of the World Wide Web and the Interne ...
and the
September 11 attacks The September 11 attacks, also known as 9/11, were four coordinated Islamist terrorist suicide attacks by al-Qaeda against the United States in 2001. Nineteen terrorists hijacked four commercial airliners, crashing the first two into ...
, as well as to combat a perceived risk of
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...
. As early as 2002, it was apparent that credit was fueling housing instead of business investment as some economists went so far as to advocate that the Fed "needs to create a housing bubble to replace the Nasdaq bubble". Moreover, empirical studies using data from advanced countries show that excessive credit growth contributed greatly to the severity of the crisis. Additional downward pressure on interest rates was created by rising U.S. current account deficit, which peaked along with the housing bubble in 2006. Federal Reserve chairman
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Federal Reserve, he was appointed a distinguished fellow at the Brookings Insti ...
explained how trade deficits required the U.S. to borrow money from abroad, in the process bidding up bond prices and lowering interest rates. Bernanke explained that between 1996 and 2004, the U.S. current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations. The
balance of payments In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a ...
identity requires that a country (such as the US) running a current account deficit also have a
capital account In macroeconomics and international finance, the capital account, also known as the capital and financial account, records the net flow of Foreign direct investment, investment into an economy. It is one of the two primary components of the balan ...
(investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the U.S. to finance its imports. All of this created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend either because they had very high personal savings rates (as high as 40% in China) or because of high oil prices.
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Federal Reserve, he was appointed a distinguished fellow at the Brookings Insti ...
referred to this as a " saving glut". A flood of funds (
capital Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econom ...
or
liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...
) reached the U.S. financial markets. Foreign governments supplied funds by purchasing
Treasury bond United States Treasury securities, also called Treasuries or Treasurys, are government bond, government debt instruments issued by the United States Department of the Treasury to finance government spending as a supplement to taxation. Sinc ...
s and thus avoided much of the direct effect of the crisis. U.S. households, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
. The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in one-year and five-year
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
(ARM) rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates, and it became riskier to speculate in housing. U.S. housing and financial assets dramatically declined in value after the housing bubble burst.


Weak and fraudulent underwriting practices

Subprime lending standards declined in the U.S.: in early 2000, a subprime borrower had a FICO score of 660 or less. By 2005, many lenders dropped the required FICO score to 620, making it much easier to qualify for prime loans and making subprime lending a riskier business. Proof of income and assets were de-emphasized. Loans at first required full documentation, then low documentation, then no documentation. One subprime mortgage product that gained wide acceptance was the no income, no job, no asset verification required (NINJA) mortgage. Informally, these loans were aptly referred to as " liar loans" because they encouraged borrowers to be less than honest in the loan application process. Testimony given to the Financial Crisis Inquiry Commission by
whistleblower Whistleblowing (also whistle-blowing or whistle blowing) is the activity of a person, often an employee, revealing information about activity within a private or public organization that is deemed illegal, immoral, illicit, unsafe, unethical or ...
Richard M. Bowen III, on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
, where he was responsible for over 220 professional underwriters, suggests that by 2006 and 2007, the collapse of
mortgage underwriting Mortgage underwriting is the process a lender uses to determine if the risk (especially the risk that the borrower will default ) of offering a mortgage loan to a particular borrower is acceptable and is a part of the larger mortgage origination ...
standards was endemic. His testimony stated that by 2006, 60% of mortgages purchased by
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
from some 1,600 mortgage companies were "defective" (were not underwritten to policy, or did not contain all policy-required documents)—this, despite the fact that each of these 1,600 originators was contractually responsible (certified via representations and warrantees) that its mortgage originations met
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
standards. Moreover, during 2007, "defective mortgages (from mortgage originators contractually bound to perform underwriting to Citi's standards) increased ... to over 80% of production". In separate testimony to the Financial Crisis Inquiry Commission, officers of Clayton Holdings, the largest residential loan due diligence and securitization surveillance company in the United States and Europe, testified that Clayton's review of over 900,000 mortgages issued from January 2006 to June 2007 revealed that scarcely 54% of the loans met their originators' underwriting standards. The analysis (conducted on behalf of 23 investment and commercial banks, including 7 "
too big to fail "Too big to fail" (TBTF) is a theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected with an economy that their failure would be disastrous to the greater e ...
" banks) additionally showed that 28% of the sampled loans did not meet the minimal standards of any issuer. Clayton's analysis further showed that 39% of these loans (i.e. those not meeting ''any'' issuer's minimal underwriting standards) were subsequently securitized and sold to investors.


Predatory lending

Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. In June 2008, Countrywide Financial was sued by then California Attorney General Jerry Brown for "unfair business practices" and "false advertising", alleging that Countrywide used "deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors". In May 2009, Bank of America modified 64,000 Countrywide loans as a result. When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender. One Countrywide employee—who would later plead guilty to two counts of wire fraud and spent 18 months in prison—stated that, "If you had a pulse, we gave you a loan." Former employees from Ameriquest, which was United States' leading wholesale lender, described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits. There is growing evidence that such mortgage frauds may be a cause of the crisis.


Deregulation and lack of regulation

According to Barry Eichengreen, the roots of the financial crisis lay in the deregulation of financial markets. A 2012 OECD study suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Key examples include: * Jimmy Carter's Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) phased out several restrictions on banks' financial practices, broadened their lending powers, allowed credit unions and savings and loans to offer checkable deposits, and raised the
deposit insurance Deposit insurance, deposit protection or deposit guarantee is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance or deposit ...
limit from $40,000 to $100,000 (thereby potentially lessening depositor scrutiny of lenders' risk management policies). * In October 1982, U.S. President Ronald Reagan signed into law the Garn–St. Germain Depository Institutions Act, which provided for
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
loans, began the process of banking deregulation, and contributed to the savings and loan crisis of the late 1980s/early 1990s. * In November 1999, U.S. President Bill Clinton signed into law the Gramm–Leach–Bliley Act, which repealed provisions of the Glass-Steagall Act that prohibited a
bank holding company A bank holding company is a company that controls one or more banks, but does not necessarily engage in banking itself. The compound bancorp (''banc''/''bank'' + '' corp ration') or bancorporation is often used to refer to such companies as w ...
from owning other financial companies. The repeal effectively removed the separation that previously existed between Wall Street investment banks and depository banks, providing a government stamp of approval for a universal risk-taking banking model. Investment banks such as Lehman became competitors with commercial banks. Some analysts say that this repeal directly contributed to the severity of the crisis, while others downplay its impact since the institutions that were greatly affected did not fall under the jurisdiction of the act itself. * In 2004, the U.S. Securities and Exchange Commission relaxed the net capital rule, which enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. The SEC conceded that self-regulation of investment banks contributed to the crisis. * Financial institutions in the
shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2 ...
are not subject to the same regulation as depository banks, allowing them to assume additional debt obligations relative to their financial cushion or capital base. This was the case despite the Long-Term Capital Management debacle in 1998, in which a highly leveraged shadow institution failed with systemic implications and was bailed out. * Regulators and accounting standard-setters allowed depository banks such as
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
to move significant amounts of assets and liabilities off-balance sheet into complex legal entities called structured investment vehicles, masking the weakness of the capital base of the firm or degree of financial leverage, leverage or risk taken. Bloomberg News estimated that the top four U.S. banks will have to return between $500 billion and $1 trillion to their balance sheets during 2009. This increased uncertainty during the crisis regarding the financial position of the major banks. Off-balance sheet entities were also used in the Enron scandal, which brought down Enron in 2001. * As early as 1997, Federal Reserve chairman
Alan Greenspan Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He worked as a private adviser and provided consulting for firms through his company, Greenspan Associates L ...
fought to keep the derivatives market unregulated. With the advice of the Working Group on Financial Markets, the U.S. Congress and President Bill Clinton allowed the self-regulation of the
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid pres ...
derivatives market when they enacted the Commodity Futures Modernization Act of 2000. Written by Congress with lobbying from the financial industry, it banned the further regulation of the derivatives market. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate against particular credit risks without necessarily owning the underlying debt instruments. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. Total over-the-counter (OTC) derivative notional value rose to $683 trillion by June 2008. Warren Buffett famously referred to derivatives as "financial weapons of mass destruction" in early 2003. A 2011 paper suggested that Canada's avoidance of a banking crisis in 2008 (as well as in prior eras) could be attributed to Canada possessing a single, powerful, overarching regulator, while the United States had a weak, crisis prone and fragmented banking system with multiple competing regulatory bodies.


Increased debt burden or overleveraging

Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses. Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators to monitor and try to reduce financial institution risk levels. U.S. households and financial institutions became increasingly indebted or financial leverage, overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn. Key statistics include: Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion over the period, contributing to economic growth worldwide. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion (c. $ in ). U.S. household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990. In 1981, U.S. private debt was 123% of GDP; by the third quarter of 2008, it was 290%. From 2004 to 2007, the top five U.S.
investment banks Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by und ...
each significantly increased their financial leverage, which increased their vulnerability to a financial shock. Changes in capital requirements, intended to keep U.S. banks competitive with their European counterparts, allowed lower ''risk weightings'' for AAA-rated securities. The shift from first-loss tranches to AAA-rated tranches was seen by regulators as a risk reduction that compensated the higher leverage. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of U.S. nominal GDP for 2007.
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
bankruptcy of Lehman Brothers, went bankrupt and was liquidated,
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
and
Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...
were sold at fire-sale prices, and
Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...
and
Morgan Stanley Morgan Stanley is an American multinational investment bank and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in 42 countries and more than 80,000 employees, the firm's clients in ...
became commercial banks, subjecting themselves to more stringent regulation. With the exception of Lehman, these companies required or received government support. Fannie Mae and Freddie Mac, two U.S.
government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of Credit (finance), credit to targeted sectors of the economy, to make tho ...
s, owned or guaranteed nearly $5 trillion (c. $ in ) trillion in mortgage obligations at the time they were placed into conservatorship by the U.S. government in September 2008. These seven entities were highly leveraged and had $9 trillion in debt or guarantee obligations; yet they were not subject to the same regulation as depository banks. Behavior that may be optimal for an individual, such as saving more during adverse economic conditions, can be detrimental if too many individuals pursue the same behavior, as ultimately one person's consumption is another person's income. Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession. Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage (debt relative to equity) cannot all de-leverage simultaneously without significant declines in the value of their assets. In April 2009,
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
vice-chair Janet Yellen discussed these paradoxes:


Financial innovation and complexity

The term
financial innovation Financial innovation is the act of creating new financial instruments as well as new financial technologies, institutions, and markets. Recent financial innovations include hedge funds, private equity, weather derivatives, retail-structured pr ...
refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. Examples pertinent to this crisis included: the
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
; the bundling of subprime mortgages into
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
(MBS) or
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...
s (CDO) for sale to investors, a type of
securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...
; and a form of credit insurance called credit default swaps (CDS). The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions. CDO issuance grew from an estimated $20 billion in Q1 2004 to its peak of over $180 billion by Q1 2007, then declined back under $20 billion by Q1 2008. Further, the credit quality of CDO's declined from 2000 to 2007, as the level of subprime and other non-prime mortgage debt increased from 5% to 36% of CDO assets. As described in the section on subprime lending, the CDS and portfolio of CDS called
synthetic CDO A synthetic CDO is a variation of a CDO (collateralized debt obligation) that generally uses credit default swaps and other derivatives to obtain its investment goals.Lemke, Lins and Picard, ''Mortgage-Backed Securities'', §5:16 (Thomson West, 2 ...
enabled a theoretically infinite amount to be wagered on the finite value of housing loans outstanding, provided that buyers and sellers of the derivatives could be found. For example, buying a CDS to insure a CDO ended up giving the seller the same risk as if they owned the CDO, when those CDO's became worthless. This boom in innovative financial products went hand in hand with more complexity. It multiplied the number of actors connected to a single mortgage (including mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, and finally investors, insurances and providers of repo funding). With increasing distance from the underlying asset these actors relied more and more on indirect information (including FICO scores on creditworthiness, appraisals and due diligence checks by third party organizations, and most importantly the computer models of rating agencies and risk management desks). Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse. Economists have studied the crisis as an instance of cascades in financial networks, where institutions' instability destabilized other institutions and led to knock-on effects. Martin Wolf, chief economics commentator at the ''Financial Times'', wrote in June 2009 that certain financial innovations enabled firms to circumvent regulations, such as off-balance sheet financing that affects the leverage or capital cushion reported by major banks, stating: "an enormous part of what banks did in the early part of this decade—the off-balance-sheet vehicles, the derivatives and the 'shadow banking system' itself—was to find a way round regulation."


Incorrect pricing of risk

Mortgage risks were underestimated by almost all institutions in the chain from originator to investor by underweighting the possibility of falling housing prices based on historical trends of the past 50 years. Limitations of default and prepayment models, the heart of pricing models, led to overvaluation of mortgage and asset-backed products and their derivatives by originators, securitizers, broker-dealers, rating-agencies, insurance underwriters and the vast majority of investors (with the exception of certain hedge funds). While financial derivatives and structured products helped partition and shift risk between financial participants, it was the underestimation of falling housing prices and the resultant losses that led to aggregate risk. For a variety of reasons, market participants did not accurately measure the risk inherent with financial innovation such as MBS and CDOs or understand its effect on the overall stability of the financial system. The pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. Banks estimated that $450 billion of CDO were sold between "late 2005 to the middle of 2007"; among the $102 billion of those that had been liquidated, JPMorgan estimated that the average recovery rate for "high quality" CDOs was approximately 32 cents on the dollar, while the recovery rate for mezzanine capital CDO was approximately five cents for every dollar. AIG insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September 2008. U.S. taxpayers provided over $180 billion in government loans and investments in AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions. The Financial Crisis Inquiry Commission (FCIC) made the major government study of the crisis. It concluded in January 2011: The limitations of a widely used financial model also were not properly understood. This formula assumed that the price of CDS was correlated with and could predict the correct price of mortgage-backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies. According to one ''Wired'' article: As financial assets became more complex and harder to value, investors were reassured by the fact that the international bond rating agencies and bank regulators accepted as valid some complex mathematical models that showed the risks were much smaller than they actually were. George Soros commented that "The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility." A conflict of interest between investment management professional and institutional investors, combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets. Professional investment managers generally are compensated based on the volume of client
assets under management In finance, assets under management (AUM), sometimes called fund under management, refers to the total market value of all financial assets that a financial institution—such as a mutual fund, venture capital firm, or depository institutio ...
. There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation. As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients. Many asset managers continued to invest client funds in over-priced (under-yielding) investments, to the detriment of their clients, so they could maintain their assets under management. They supported this choice with a "plausible deniability" of the risks associated with subprime-based credit assets because the loss experience with early "vintages" of subprime loans was so low. Despite the dominance of the above formula, there are documented attempts of the financial industry, occurring before the crisis, to address the formula limitations, specifically the lack of dependence dynamics and the poor representation of extreme events. The volume ''Credit Correlation: Life After Copulas'', published in 2007 by World Scientific, summarizes a 2006 conference held by Merrill Lynch in London where several practitioners attempted to propose models rectifying some of the copula limitations. See also the article by Donnelly and Embrechts and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in 2006.


Boom and collapse of the shadow banking system

There is strong evidence that the riskiest, worst performing mortgages were funded through the "
shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2 ...
" and that competition from the
shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2 ...
may have pressured more traditional institutions to lower their underwriting standards and originate riskier loans. In a June 2008 speech, President and CEO of the Federal Reserve Bank of New York Timothy Geithner—who in 2009 became
United States Secretary of the Treasury The United States secretary of the treasury is the head of the United States Department of the Treasury, and is the chief financial officer of the federal government of the United States. The secretary of the treasury serves as the principal a ...
—placed significant blame for the freezing of credit markets on a Bank run, run on the entities in the "parallel" banking system, also called the
shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2 ...
. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because of asset–liability mismatch, meaning that they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would force them to engage in rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: Economist
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American New Keynesian economics, New Keynesian economist who is the Distinguished Professor of Economics at the CUNY Graduate Center, Graduate Center of the City University of New York. He ...
, laureate of the Nobel Memorial Prize in Economic Sciences, described the run on the shadow banking system as the "core of what happened" to cause the crisis. He referred to this lack of controls as "Benign neglect, malign neglect" and argued that regulation should have been imposed on all banking-like activity. Without the ability to obtain investor funds in exchange for most types of
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations. This meant that nearly one-third of the U.S. lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, at that time the traditional banking system did not have the capital to close this gap: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of
securitization Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and sellin ...
were "likely to vanish forever, having been an artifact of excessively loose credit conditions". While traditional banks raised their lending standards, it was the collapse of the shadow banking system that was the primary cause of the reduction in funds available for borrowing.


Commodity prices

In a 2008 paper, Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas argued that the financial crisis was attributable to "global asset scarcity, which led to large capital flows toward the United States and to the creation of asset bubbles that eventually burst". Caballero, Farhi, and Gourinchas argued "that the sharp rise in oil prices following the subprime crisis – nearly 100 percent in just a matter of months and on the face of recessionary shocks – was the result of a speculative response to the financial crisis itself, in an attempt to rebuild asset supply. That is, the global economy was subject to one shock with multiple implications rather than to two separate shocks (financial and oil)." Long-only commodity index funds became popular – by one estimate investment increased from $90 billion in 2006 to $200 billion at the end of 2007, while commodity prices increased 71% – which raised concern as to whether these index funds caused the commodity bubble. The empirical research has been mixed.


The Globals Savings Glut

The cause of the global asset bubble can be partially attributable to the global savings glut. As theorized by Andrew Metrick, the demand for safe assets following the Asian Financial Crisis coupled with the lack of circulating treasuries created an unmet demand for "risk free" assets. Thus, institutional investors like sovereign wealth funds and pension funds began purchasing synthetic safe assets like Triple-A Mortgage Backed Securities. As a consequence, the demand for so-called safe assets fueled the free flow of capital into housing in the United States. This greatly worsened the crisis as banks and other financial institutions were incentivized to issue more mortgages than before.


Systemic crisis of capitalism

In a 1998 book, John McMurtry (academic), John McMurtry suggested that a financial crisis is a systemic crisis of capitalism itself. In his 1978 book, ''The Downfall of Capitalism and Communism'', Ravi Batra suggests that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes. He also suggested that a "demand gap" related to differing wage and productivity growth explains deficit and debt dynamics important to stock market developments. John Bellamy Foster, a political economy analyst and editor of the ''Monthly Review'', believed that the decrease in GDP growth rates since the early 1970s is due to increasing market saturation. Marxian economics followers Andrew Kliman, Michael Roberts, and Guglielmo Carchedi, in contradistinction to the ''Monthly Review'' school represented by Foster, pointed to capitalism's long-term tendency of the rate of profit to fall as the underlying cause of crises generally. From this point of view, the problem was the inability of capital to grow or accumulate at sufficient rates through productive investment alone. Low rates of profit in productive sectors led to speculative investment in riskier assets, where there was potential for greater return on investment. The speculative frenzy of the late 1990s and 2000s was, in this view, a consequence of a rising organic composition of capital, expressed through the fall in the rate of profit. According to Michael Roberts, the fall in the rate of profit "eventually triggered the credit crunch of 2007 when credit could no longer support profits". In 2005 book, ''The Battle for the Soul of Capitalism'', John C. Bogle wrote that "Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long". Echoing the central thesis of James Burnham's 1941 seminal book, ''James Burnham#The Managerial Revolution, The Managerial Revolution'', Bogle cites issues, including: * that "manager's capitalism" replaced "owner's capitalism", meaning management runs the firm for its benefit rather than for the shareholders, a variation on the principal–agent problem; * the burgeoning executive compensation; * the management of earnings, mainly a focus on share price rather than the creation of genuine value; and * the failure of gatekeepers, including auditors, boards of directors, Wall Street analysts, and career politicians. In his book ''The Big Mo (book), The Big Mo'', Mark Roeder, a former executive at the Swiss-based
UBS UBS Group AG (stylized simply as UBS) is a multinational investment bank and financial services firm founded and based in Switzerland, with headquarters in both Zurich and Basel. It holds a strong foothold in all major financial centres as the ...
Bank, suggested that large-scale momentum, or The Big Mo, "played a pivotal role" in the financial crisis. Roeder suggested that "recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect. This has made the financial sector inherently unstable." Robert Reich attributed the economic downturn to the stagnation of wages in the United States, particularly those of the hourly workers who comprise 80% of the workforce. This stagnation forced the population to borrow to meet the cost of living. Economists Ailsa McKay and Margunn Bjørnholt argued that the financial crisis and the response to it revealed a crisis of ideas in mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession.


Wrong banking model: resilience of credit unions

A report by the International Labour Organization concluded that cooperative banking institutions were less likely to fail than their competitors during the crisis. The cooperative banking sector had 20% market share of the European banking sector, but accounted for only 7% of all the write-downs and losses between the third quarter of 2007 and first quarter of 2011. In 2008, in the U.S., the rate of commercial bank failures was almost triple that of credit unions, and almost five times the credit union rate in 2010. Credit unions increased their lending to small- and medium-sized businesses while overall lending to those businesses decreased.


Prediction by economists

Economists, particularly followers of mainstream economics, mostly failed to predict the crisis. The Wharton School of the University of Pennsylvania's online business journal examined why economists failed to predict a major global financial crisis and concluded that economists used mathematical models that failed to account for the critical roles that banks and other financial institutions, as opposed to producers and consumers of goods and services, play in the economy. Several followers of heterodox economics predicted the crisis, with varying arguments. Dirk Bezemer credits 12 economists with predicting the crisis:
Dean Baker Dean Baker (born July 13, 1958) is an American macroeconomist who co-founded the Center for Economic and Policy Research (CEPR) with Mark Weisbrot. Baker has been credited as one of the first economists to have identified the 2007–08 United S ...
(US), Wynne Godley (UK), Fred Harrison (author), Fred Harrison (UK), Michael Hudson (economist), Michael Hudson (US), Eric Janszen (US), Steve Keen (Australia), Jakob Broechner Madsen & Jens Kjaer Sørensen (Denmark), Med Jones (US) Kurt Richebächer (US), Nouriel Roubini (US), Peter Schiff (US), and Robert Shiller (US). Shiller, a founder of the Case–Shiller index that measures home prices, wrote an article a year before the collapse of Lehman Brothers in which he predicted that a slowing U.S. housing market would cause the housing bubble to burst, leading to financial collapse. Peter Schiff regularly appeared on television in the years before the crisis and warned of the impending real estate collapse. The Austrian School regarded the crisis as a vindication and classic example of a predictable credit-fueled bubble caused by laxity in monetary supply. There were other economists that did warn of a pending crisis. The former Governor of the Reserve Bank of India, Raghuram Rajan, had predicted the crisis in 2005 when he became chief economist at the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...
. In 2005, at a celebration honoring
Alan Greenspan Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He worked as a private adviser and provided consulting for firms through his company, Greenspan Associates L ...
, who was about to retire as chairman of the US Federal Reserve, Rajan delivered a controversial paper that was critical of the financial sector. In that paper, Rajan "argued that disaster might loom". Rajan argued that financial sector managers were encouraged to "take risks that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialize, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimized." Stock trader and financial risk engineer Nassim Nicholas Taleb, author of the 2007 book ''The Black Swan: The Impact of the Highly Improbable, The Black Swan'', spent years warning against the breakdown of the banking system in particular and the economy in general owing to their use of and reliance on bad risk models and reliance on forecasting, and framed the problem as part of "robustness and fragility". He also took action against the establishment view by making a big financial bet on banking stocks and making a fortune from the crisis ("They didn't listen, so I took their money"). According to David Brooks (commentator), David Brooks from ''The New York Times'', "Taleb not only has an explanation for what's happening, he saw it coming." Popular articles published in the mass media have led the general public to believe that the majority of economists have failed in their obligation to predict the financial crisis. For example, an article in ''The New York Times'' noted that economist Nouriel Roubini warned of such crisis as early as September 2006, and stated that the profession of economics is bad at predicting recessions. According to ''The Guardian'', Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while ''The New York Times'' labelled him "Dr. Doom". In a 2012 article in the journal ''Japan and the World Economy'', Andrew K. Rose and Mark M. Spiegel used a Multiple Indicator Multiple Cause (MIMIC) model on a cross-section of 107 countries to evaluate potential causes of the 2008 crisis. The authors examined various economic indicators, ignoring Financial contagion, contagion effects across countries. The authors concluded: "We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of 'early warning' systems of potential crises, which must also predict their timing."


IndyMac

The first visible institution to run into trouble in the United States was the Southern California–based IndyMac, a spin-off of Countrywide Financial. Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles market and the seventh largest
mortgage loan A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
originator in the United States. The failure of IndyMac Bank on July 11, 2008, was the fourth largest Bank run, bank failure in
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
history up until the crisis precipitated even larger failures, and the second largest failure of a regulated savings and loan association, thrift. IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank. IndyMac Bancorp filed for Chapter 7 bankruptcy in July 2008. IndyMac Bank was founded as Countrywide Mortgage Investment in 1985 by David S. Loeb and Angelo Mozilo as a means of Cross-collateralization, collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae. In 1997, Countrywide spun off IndyMac as an independent company run by Mike Perry, who remained its CEO until the downfall of the bank in July 2008. The primary causes of its failure were largely associated with its business strategy of originating and securitizing Alt-A loans on a large scale. This strategy resulted in rapid growth and a high concentration of risky assets. From its inception as a savings association in 2000, IndyMac grew to the seventh largest savings and loan and ninth largest originator of mortgage loans in the United States. During 2006, IndyMac originated over $90 billion (~$ in ) of mortgages. IndyMac's aggressive growth strategy, use of Alt-A and other nontraditional loan products, insufficient underwriting, credit concentrations in residential real estate in the California and Florida markets—states, alongside Nevada and Arizona, where the United States housing bubble, housing bubble was most pronounced—and heavy reliance on costly funds borrowed from a Federal Home Loan Bank (FHLB) and from brokered deposits, led to its demise when the mortgage market declined in 2007. IndyMac often made loans without verification of the borrower's income or assets, and to borrowers with poor credit histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. As an Alt-A lender, IndyMac's business model was to offer loan products to fit the borrower's needs, using an extensive array of risky option-
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...
s (option ARMs), subprime loans, 80/20 loans, and other nontraditional products. Ultimately, loans were made to many borrowers who simply could not afford to make their payments. The thrift remained profitable only as long as it was able to sell those loans in the secondary mortgage market. IndyMac resisted efforts to regulate its involvement in those loans or tighten their issuing criteria: see the comment by Ruthann Melbourne, Chief Risk Officer, to the regulating agencies. On May 12, 2008, in the "Capital" section of its last 10-Q, IndyMac revealed that it may not be well capitalized in the future. IndyMac reported that during April 2008, Moody's and Standard & Poor's downgraded the ratings on a significant number of Mortgage-backed security (MBS) bonds—including $160 million (~$ in ) issued by IndyMac that the bank retained in its MBS portfolio. IndyMac concluded that these downgrades would have harmed its risk-based capital ratio as of June 30, 2008. Had these lowered ratings been in effect on March 31, 2008, IndyMac concluded that the bank's capital ratio would have been 9.27% total risk-based. IndyMac warned that if its regulators found its capital position to have fallen below "well capitalized" (minimum 10% risk-based capital ratio) to "adequately capitalized" (8–10% risk-based capital ratio) the bank might no longer be able to use brokered deposits as a source of funds. Senator Charles Schumer (D-NY) later pointed out that brokered deposits made up more than 37% of IndyMac's total deposits, and asked the
Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is a State-owned enterprises of the United States, United States government corporation supplying deposit insurance to depositors in American commercial banks and savings banks. The FDIC was cr ...
(FDIC) whether it had considered ordering IndyMac to reduce its reliance on these deposits. With $18.9 billion in total deposits reported on March 31, Senator Schumer would have been referring to a little over $7 billion in brokered deposits. While the breakout of maturities of these deposits is not known exactly, a simple averaging would have put the threat of brokered deposits loss to IndyMac at $500 million a month, had the regulator disallowed IndyMac from acquiring new brokered deposits on June 30. IndyMac was taking new measures to preserve capital, such as deferring interest payments on some preferred securities. Dividends on common shares had already been suspended for the first quarter of 2008, after being cut in half the previous quarter. The company still had not secured a significant capital infusion nor found a ready buyer. IndyMac reported that the bank's risk-based capital was only $47 million above the minimum required for this 10% mark. But it did not reveal some of that $47 million (~$ in ) capital it claimed it had, as of March 31, 2008, was fabricated. When home prices declined in the latter half of 2007 and the secondary mortgage market collapsed, IndyMac was forced to hold $10.7 billion (~$ in ) of loans it could not sell in the secondary market. Its reduced liquidity was further exacerbated in late June 2008 when account holders withdrew $1.55 billion (~$ in ) or about 7.5% of IndyMac's deposits. This
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
on the thrift followed the public release of a letter from Senator Charles Schumer to the FDIC and OTS. The letter outlined the Senator's concerns with IndyMac. While the run was a contributing factor in the timing of IndyMac's demise, the underlying cause of the failure was the unsafe and unsound way it was operated. On June 26, 2008, Senator Charles Schumer (D-NY), a member of the Senate Banking Committee, chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, released several letters he had sent to regulators, in which he was"concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers." Some worried depositors began to withdraw money. On July 7, 2008, IndyMac announced on the company blog that it: * Had failed to raise Capital (economics), capital since its May 12, 2008, quarterly earnings report; * Had been notified by bank and thrift regulators that IndyMac Bank was no longer deemed "well-capitalized"; IndyMac announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3,800 jobs. On July 11, 2008, citing liquidity concerns, the FDIC put IndyMac Bank into conservatorship. A bridge bank (United States), bridge bank, IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets, its secured liabilities, and its insured deposit accounts. The FDIC announced plans to open IndyMac Federal Bank, FSB on July 14, 2008. Until then, depositors would have access to their insured deposits through ATMs, their existing checks, and their existing debit cards. Telephone and Internet account access was restored when the bank reopened. The FDIC guarantees the funds of all insured accounts up to US$100,000, and declared a special advance dividend to the roughly 10,000 depositors with funds in excess of the insured amount, guaranteeing 50% of any amounts in excess of $100,000. Yet, even with the pending sale of Indymac to IMB Management Holdings, an estimated 10,000 uninsured depositors of Indymac are still at a loss of over $270 million. With $32 billion in assets, IndyMac Bank was one of the largest bank failures in American history. IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, 2008. Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets. Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank
Bear Stearns The Bear Stearns Companies, Inc. was an American investment bank, securities trading, and brokerage firm that failed in 2008 during the 2008 financial crisis and the Great Recession. After its closure it was subsequently sold to JPMorgan Chas ...
would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October 2008. Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included
Lehman Brothers Lehman Brothers Inc. ( ) was an American global financial services firm founded in 1850. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merril ...
,
Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated, doing business as Merrill, and previously branded Merrill Lynch, is an American investment management and wealth management division of Bank of America. Along with BofA Securities, the investm ...
, Fannie Mae, Freddie Mac,
Washington Mutual Washington Mutual, Inc. (often abbreviated to WaMu) was an American Bank holding company, savings bank holding company based in Seattle. It was the parent company of Washington Mutual Bank, which was the largest savings and loan association in ...
,
Wachovia Wachovia was a diversified financial services company based in Charlotte, North Carolina. Before its acquisition by Wells Fargo and Company in 2008, Wachovia was the fourth-largest bank holding company in the United States, based on total asset ...
,
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
, and AIG. On October 6, 2008, three weeks after Lehman Brothers filed the largest bankruptcy in U.S. history, Lehman's former CEO Richard S. Fuld Jr. found himself before Representative Henry A. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm.


Notable books and movies

* In 2006, Peter Schiff authored a book titled ''Crash Proof: How to Profit From the Coming Economic Collapse'', which was published in February 2007 by Wiley (publisher), Wiley. The book describes various features of the economy and housing market that led to the
United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...
, and warns of the impending decline. After many of the predictions came to pass, a second edition titled ''Crash Proof 2.0'' was published in 2009, which included a "2009 update" addendum at the end of each chapter. It was featured on The New York Times Best Seller list. * ''Meltdown (Woods book), Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse'', by Tom Woods, was published in February 2009 by Regnery Publishing. It was featured on The New York Times Best Seller list for 10 weeks. * The US documentary program ''Frontline (American TV program), Frontline'' produced several episodes investigating various aspects of the crisis: **
Inside the Meltdown
(Season 2009: Episode 8) **
Ten Trillion and Counting
(Season 2009: Episode 9) **
Breaking the Bank
(Season 2009: Episode 15) **
The Warning
(Season 2009: Episode 2) * A 2010 documentary film, ''Overdose: A Film about the Next Financial Crisis'', describes how the financial crisis came about and how the solutions that have been applied by many governments are setting the stage for the next crisis. The film is based on the book ''Financial Fiasco'' by Johan Norberg and features
Alan Greenspan Alan Greenspan (born March 6, 1926) is an American economist who served as the 13th chairman of the Federal Reserve from 1987 to 2006. He worked as a private adviser and provided consulting for firms through his company, Greenspan Associates L ...
, with funding from the libertarian think tank Cato Institute. * In October 2010, a documentary film about the crisis, ''Inside Job (2010 film), Inside Job'' directed by Charles Ferguson (filmmaker), Charles Ferguson, was released by Sony Pictures Classics. In 2011, it won the Academy Award for Best Documentary Feature at the 83rd Academy Awards. * Set on the night before the crisis broke, the 2011 film ''Margin Call'' is a movie that follows traders through a sleepless 24 hours as they try to contain the damage after an analyst discovers information that is likely to ruin their firm, and possibly the whole economy. * The 2011 film ''Too Big to Fail (film), Too Big to Fail'' is based on Andrew Ross Sorkin's 2009 non-fiction book ''Too Big to Fail (book), Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System – and Themselves''. *
Michael Lewis Michael Monroe Lewis (born October 15, 1960) Gale Biography In Context. is an American author and financial journalist. He has also been a contributing editor to '' Vanity Fair'' since 2009, writing mostly on business, finance, and economics. ...
authored a best-selling non-fiction book about the crisis, entitled ''The Big Short''. In 2015, it was adapted into a The Big Short (film), film of the same name, which won the Academy Award for Best Adapted Screenplay. One point raised is to what extent those outside of the markets themselves (i.e., not working for a mainstream investment bank) could forecast the events and be generally less myopic. * Simon Reid-Henry's 2019 book ''Empire of Democracy'' describes how liberal norms in the West were replaced by populism as a consequence of the 2007–08 financial crisis, as well as neoliberal policies that had emerged in previous decades which hollowed out government and changed voter expectations.


See also

* Banking (Special Provisions) Act 2008 (United Kingdom) * 2008–2009 Keynesian resurgence * 2010 United States foreclosure crisis * 2012 May Day protests *
2000s commodities boom The 2000s commodities boom, commodities super cycle or China boom was the rise of many physical commodity prices (such as those of food, oil, metals, chemicals and fuels) during the early 21st century (2000–2014), following the Great Commoditie ...
* Crisis theory * Kondratiev wave * List of acronyms associated with the eurozone crisis * List of bank failures in the United States (2008–present) * List of banks acquired or bankrupted during the Great Recession * List of banks acquired or bankrupted in the United States during the 2008 financial crisis * List of economic crises * List of entities involved in 2007–2008 financial crises * List of largest bank failures in the United States * Stock market crashes in India * Low-Income Countries Under Stress * Mark-to-market accounting * Neoliberalism * Occupy movement * Pessimism porn * PIGS (economics) * Private equity in the 2000s * Subprime crisis impact timeline * ''Chicago plan''


References

The initial articles and some subsequent material were adapted from the Wikinfo articl
Financial crisis of 2007–2008
released under the Wikipedia:Text of the GNU Free Documentation License, GNU Free Documentation License Version 1.2


Further reading

* David M. Kotz (2015), ''The Rise and Fall of Neoliberal Capitalism''. Harvard University Press. . * John Lanchester, ''The Invention of Money: How the heresies of two bankers became the basis of our modern economy'', The New Yorker, August 5 & 12, 2019, pp. 28–31 * Julien Mercille & Enda Murphy, 2015, ''Deepening neoliberalism, austerity, and crisis: Europe's treasure Ireland,'' Palgrave Macmillan, Basingstoke. * Nomi Prins: ''Collusion: How Central Bankers Rigged the World'', Nation Books 2018, . * Laura A. Patterson & Cynthia A. Koller (2011). ''Diffusion of Fraud Through Subprime Lending: The Perfect Storm.'' In Mathieu Deflem (ed.) ''Economic Crisis and Crime'' (Sociology of Crime Law and Deviance, Volume 16), Emerald Group Publishing, pp. 25–45. . * Charles Read (historian), Charles Read (2022). ''Calming the storms : the carry trade, the banking school and British financial crises since 1825''. Cham, Switzerland, pp. 295–305. * * Peter J. Wallison, Peter Wallison, ''Bad History, Worse Policy'' (Washington, D.C.:
American Enterprise Institute The American Enterprise Institute for Public Policy Research, known simply as the American Enterprise Institute (AEI), is a center-right think tank based in Washington, D.C., that researches government, politics, economics, and social welfare ...
, 2013) . * Palais-Royal Initiative18 high-ranking former ministers, Central Bank governors and/or officials in national or international institutions:
Sergey Aleksashenko Former Deputy Governor, Central Bank of Russia. Hamad Al Sayari Former Governor, Saudi Arabian Monetary Agency. Jack T. Boorman Former Department Director and Special Advisor to the Managing Director, IMF. Michel Camdessus Former Managing Director, IMF. Andrew Crockett (banker), Andrew Crockett Former General Manager, BIS. Guillermo De la Dehesa Former State Secretary of Economy and Finance, Spain. Arminio Fraga Former Governor, Central Bank of Brazil. Toyoo Gyohten Former Vice Minister of Finance, Japan. Xiaolian Hu Vice President of China Society of Finance and Banking. André Icard Former Deputy General Manager, BIS. Horst Koehler Former Managing Director, IMF. Alexandre Lamfalussy Former General Manager, BIS. Guillermo Ortiz Martínez, Guillermo Ortiz Former Governor, Banco de México. Tommaso Padoa-Schioppa (†) Former Minister of Finance, Italy. Maria Ramos Former Director General, National Treasury, South Africa. Y. V. Reddy, Y. Venugopal Reddy Former Governor, Reserve Bank of India. Edwin M. Truman Former Assistant Secretary for International Affairs of the U.S. Treasury. Paul A. Volcker Former Chairman, Federal Reserve Board. Joined by Isabelle Mateos y Lago Advisor, IMF. Pietro Catte Director, International Research Department, Banca d’Italia. Corrinne Ho Senior Economist, BIS. Irena Asmundson Economist, IMF. (8 February 2011)
''Reform of the International Monetary System: A Cooperative Approach for the 21st Century''
(pdf, 20 p)


External links

Reports on causes
Final Report
of the Financial Crisis Inquiry Commission
Archived website
of the Financial Crisis Inquiry Commission (maintained by the Stanford University and the Stanford Law School)
Wall Street and the Financial Crisis: Anatomy of a Financial Collapse
, Majority and Minority Staff Report,
United States Senate Homeland Security Permanent Subcommittee on Investigations The Permanent Subcommittee on Investigations (PSI), stood up in March 1941 as the "Truman Committee," is the oldest subcommittee of the United States Senate Committee on Homeland Security and Governmental Affairs (formerly the Committee on Govern ...
, April 13, 2011
What Caused the Crisis
A collection of papers at the Federal Reserve Bank of St. Louis Journalism and interviews
Inside the Meltdown
– PBS ''Frontline'' documentation including additional background article and in-depth interviews
"Money, Power & Wall Street"
– PBS ''Frontline'' documentation including additional background article and in-depth interviews * James B. Stewart, Stewart, James B.
Eight Days: the battle to save the American financial system
''The New Yorker'' magazine, September 21, 2009. pp. 58–81. Summarizing September 15–23, 2008, with interviews of Paulson, Bernanke, and Geithner by James Stewart
Panic, Fear, and Regret
– audio interviews with Timothy Geithner, Ben Bernanke and Henry Paulson from ''Marketplace (radio program), Marketplace'' {{DEFAULTSORT:2007-2008 financial crisis Great Recession 2000s in economic history 2007 in economic history 2008 in economic history Economic bubbles Economy of the United States Economy of the United Kingdom Financial crises, Financial crisis of 2007-2008 Great Recession in the United Kingdom Great Recession in the United States Presidency of Barack Obama Presidency of George W. Bush Premiership of Gordon Brown September 2008 in North America Stock market crashes Systemic risk