Between late 2007 and early 2009, American households lost an estimated $16 trillion in net worth.
A quarter of American household lost 75% or more of their net worth.
More than half of American households lost at least 25% of their net worth.
By the time it was all said and done, the wealthiest had lost the least and recovered the soonest.
We ended up calling it the Great Recession.
What was the 2008 Financial Crisis?
The crisis that threatened to collapse the international financial system, triggered the failure (or near-failure) among other things, of some of the top:
- mortgage lenders
- investment and commercial banks
- savings and loan associations
- and insurance companies.
It also brought about the Great Recession of 2007-09, which ended up being the worst economic downturn since the Great Depression of 1929-1939.
What was the role of derivatives in the Financial Crisis?
Let’s first define derivatives as securities whose price is tied to an underlying asset. They can be classified into swaps, futures, options, and forwards. [1] For example, let us look at a critical piece of the crisis, a derivative called mortgage-backed securities:
Step 1 – You Take Out a Mortgage: A bank lends you, prospective homebuyer, money
Step 2 – Bank Sells Your Mortgage: The bank then turns around and sells your mortgage to a government entity called Fannie Mae or Freddie Mac. The bank now has more money to make more loans.
Step 3 – Fannie/Freddie Re-Sell Your Mortgage: Now it’s Fannie Mae’s turn to create a mortgage-backed security (MBS) by packaging your mortgage with other mortgages and re-selling it on the secondary market to . The value of the MBS is backed by the underlying bundled mortgages.
Step 4 – Creating Tranches: Next up an investment bank or a hedge fund will divide the MBS into different portions using sophisticated computer software. Taking into account how risky each MBS portion is and the likelihood of default, etc. They then combine the MBS’ portions with similar risk levels into something called a tranche, and resell the tranche(s) to other funds.
Step 5- Boom Goes the Dynamite: A lack of proper regulation created an environment in which the market attracted all types of mortgage lenders, enforcing sufficient credit standards became a thing of the past in a fierce competition for home loans. The government actually fueled the mania by encouraging and in some cases pressuring lenders to finance high risk borrowers.
So banks and non-bank financial institutions were getting their money back right away by immediately selling the mortgage before the signature ink had even dried. Really, the temptation was irresistible and people that should not have been given loans, were given loans (mortgages). The term that ended up being used to describe such mortgages was sub-prime mortgages.
They were also mostly Adjustable Rate Mortgages, meaning after a few years the rate isn’t locked anymore and the market rate takes over, in this particular case when the rates reset the payments skyrocketed for most borrowers (who couldn’t afford them to begin with) and thus the defaults. At the same time neither they nor the banks could sell the homes and recoup the money, as demand for housing fell and so too did the home prices.
All this was a big factor in the financial crisis, as the holders of these now worthless mortgage-backed securities were scrambling to offload them onto other holders who haven’t caught on yet, pretty soon everyone was up to speed as to what was going on and there were no suckers left to buy the defaulting derivatives. The sub-prime mortgage crisis was in full effect.
Uncertainty skyrocketed and the secondary market shut down. This domino effect of the mortgage-backed securities eventually wiped out trillions of dollars from the U.S. economy and spread to other countries around the world. Then the governments stepped in to bail out the banks.
Note: The above is certainly an over simplification of the numerous events that took place and the financial instruments that were involved. That being said, below we’ll go over each significant moment throughout 2007, 2008, and 2009 to create a timeline of events for a clearer picture.
Here’s how it all went down, the 2007-09 Financial Crisis timeline:
This is also certainly not an exhaustive list of events, too many things happened between the start and finish of the Great Recession, but below is an effort to highlight some of the key players, events, and programs from the Financial Crisis between 2007 and 2009.
Home Sales Peak
Existing home sales reached an annual rate peak of 5.79 million. The month before, new home prices had peaked at $254,400. [2]
Each subsequent month brought more bad news, but economists couldn’t agree on the severity of it all, counting on prices not falling more than 10% but also not realizing just how bad the problem was. The stock market slumps were a lot better defined and easier to diagnose than this housing market crash.
Former Fed Chairman Warns of a Recession, Fed Ignores It
Alan Greenspan was the former Chairman of the Federal Reserve, his word carried a lot of weight. Once he announce a possible recession in the near future and alerted that the U.S. budget deficit was a serious concern, the stock market reacted with a massive sell-off on February 27th.[3]
The next day the then Chairman of the Fed, Ben Bernanke, testified that all was well and to not overreact. He wasn’t the only optimist in the room either, as many other senior officials tended to agree.
After Its Worst Week in Years the Stock Market Rebounds
After dropping more than 600 points from an all-time high on February 20th, the Dow Jones Industrial Average reflected the investor optimism permeating in the air and rose 1.3% (157 points) signaling a potential rebound, despite several reports outlining that the U.S. economy was under-performing.
Hedge Funds Housing Losses Spread Subprime Misery
By this time the housing slump had infected the financial services industry, with reports of hedge funds holding undisclosed amounts of mortgage-backed securities making their rounds. Hedge funds weren’t regulated by the SEC and no one knew just what percent of their substantial investments were tainted with toxic debt.
However, signs started to surface, as the Dow plummeted 2%, it’s second-largest decline in two years, which only served to add gasoline to the fire the subprime lenders’ were hoping to contain.[4]
Fed Ignores Warning Signs, Stock Market Takes Notice
The stock markets reacted to the March Federal Open Market Committee meeting report with a 90 points drop in disapproval. Concerned investors were hoping to hear the Fed would consider dropping the fed funds rate, but the Fed was concerned more with inflation and ruled out an act of expansionary monetary policy anytime soon.
More Help Needed for Homeowners
The direness of the situation was starting to come into focus and the Federal Reserve started encouraging lenders to work out an arrangement with their borrowers instead of foreclosing on their homes. [5]
Suggestions like converting the loans to a fixed rate mortgage and offering credit counseling. Fannie Mae and Freddie Mac launched programs like “HomeStay” and “HomePossible” in hopes of helping subprime mortgage borrowers keep their homes.
The programs helped people switch to fixed rates, but didn’t help those who were already underwater, which by the time these programs made their rounds, were most of them.
Durable Goods Orders Signaling Recession
Though the 3.4% increase in durable good orders was better than the 2.4% increase in February and the 8.8% drop in January, comparing the orders on a year-over-year basis painted a different picture.
In comparison to 2006, the March figure declined 2%, and the February figure declined 0.4%. These figures are important because they represent big-ticket purchases by businesses.
Meaning companies will hold off making these purchases if their economic confidence is shaky. Fewer orders also mean less production, which leads to a decline in GDP growth.
Expert Home Sales Forecast Revised Down
The National Association of Realtors revised their forecast predicting home sales falling 6.18 million in 2007 and 6.41 million in 2008. Their initial prediction had 6.3 million sales in 2007 and 6.5 million in 2008. [6] They also forecasted existing-home price average to decline by 1.3% in 2007, but caveating it with a 1.7% predicted increase in 2008.
Federal Reserve Lowers Rate to 4.75%
Breaking from a tradition of adjusting the benchmark fed funds rate a quarter-point at a time, the Federal Open Market Committee (FOMC) dropped the rate a half-point down from 5.25%. [7] It signaled that something serious was going on inside the Fed.
Something was indeed going on, as the fed went on to lower the rate twice more to a low of 4.25% in December 2007. The thing that was going on is that banks were refusing to lend to each other in fear of getting stuck with subprime mortgages, the Fed believed the lower rates would re-ignite the confidence in lending.
LIBOR Rate Unexpectedly Diverges
As the banks were afraid to lend to one another, something called The London Interbank Offered Rate (LIBOR) started to rise. The LIBOR is an average of what banks think they would be charged were they to borrow from other banks, a benchmark interest rate of inter-bank lending.
This rate is usually a few tenths of a point above the fed funds rate, but by this time in 2007, it was almost a full point higher, which usually means an economic crisis is coming.
Fed Governor Warns Crisis Not Over
The Governor of the Federal Reserve, Randall Kroszner, states, “the recovery may be a relatively gradual process, and these markets may not look the same when they re-emerge.” [7]
He, and many other, started to realize that these complicated derivatives, the likes of collateralized debt obligations (CDOs), which even the financial experts had a hard time understanding, were on their way to contributing a critically damaging blow to the country’s economy.
Existing-home sales fell that month by 1.2% to 4.97 million, the lowest sales pace since the National Association of Realtors began tracking it in 1999. Home prices fell 5.1%, housing inventory rose 1.9%, and inside the financial world where these derivatives typically change hands, trust was lacking and panic ensuing.
A $75 Billion Superfund is Created by the Treasury
The then Treasury Secretary, Henry Paulson, sat down with three major banks (JP Morgan Chase, Bank of America, and Citigroup) and convinced them to put together a BlackRock managed $75 billion superfund, which would buy distressed portfolios of defunct subprime mortgages.
It was an attempt to subdue further economic decline, and buy these banks and hedge funds some time to figure out how to put an accurate price on these derivatives. Essentially, the banks were being guaranteed by the government to take on more subprime debt.
Fed Announces Term Auction Facility
It’s December and banks are still afraid to lend each other money. Lowering the rate at which they could do so wasn’t enough to boost their confidence.
Grasping at straws in hopes of infusing the financial markets with some liquidity, the Fed created something called the Term Auction Facility (TAF). It offered short-term credit to banks holding the sub-prime mortgage debt. These were crisis advertence loans, to be paid back to the Fed when/if things calmed down.
It provided the banks with a chance to gradually take care of their toxic debt, a chance to find additional funds, and saved the taxpayers from having to foot an even larger tax bill at the end of the day. The Fed would continue this program throughout March 8, 2010.
Stats Show Foreclosure Rates Doubled
RealtyTrac released their figures and showed foreclosure rates in December 2007 were 97% higher than in December 2006, and the total foreclosure rate for 2007 was 75% higher than that of 2006.
The Center for Responsible Lending estimated foreclosures increasing by 1 to 2 million over the next two years. Tightening lending standards and lower home prices were inhibiting borrowers from being able to refinance.
They warned that prices were on their way to being depressed by $202 billion, which would cause over 40 million homes to lose $,5000 each, on average. Home prices also fell 6%, the third drop in four months, and the stock market was starting to correct.
Federal Reserve Tries to Stop Housing Bust
New year, new problems. Existing home sales for January 2008 fell to their lowest level in 10 years. The Federal Market Open Committee responded by lowering the fed funds rate, again, dropping it to 3.5% on January 22, 2008.
A week later they would reduce the rate once more, to 3.0%. Some had hoped the rate reduction would restore demand for home buying, as the rate for a 30-year conventional loan went to 5.7% from 6.22% in 2007.
However, this didn’t help the millions who were holding adjustable-rate mortgages, many of whom bought homes at undesirable rates hoping to sell the homes before the rate-lock expired. And when home prices fell, they couldn’t sell, nor could they afford the higher monthly payments once their interest rate reset.
At which point they were headed into foreclosure. There were 57% more foreclosures in January 2008 than in January 2007, which still happened to be better than the December 2007 figure.
As Home Sales Continue to Plummet, Bush Signs Tax Rebate
President Bush attempts to help the gloomy housing market, signing a tax rebate bill which increased limits for Federal Housing Administrations loans.
This paved way for Freddie Mac to repurchase jumbo loans. Home sales declined 24% year-over-year to 5.03 million in February. The median resale home price declined by 8.2% year-over-year to $195,900, and foreclosures went up 60% year-over-year, in line with January’s 57%.
Federal Reserve Begins Bailouts
The Fed’s role of the “bank of last resort” was on full display. It’s goal was to lower the LIBOR and keep adjustable-rate mortgages low and affordable. Taking on bad debt temporarily for 28-days in an effort to buy time.
March 11th the Fed announced $200 billion in Treasury noted to bail our bond dealers stuck with mortgage-backed securities and other collateralized debt obligations with no chance of reselling them. Then, on March 14th the Fed held its first emergency weekend meeting in 30 years.
March 17th it announced it would guarantee the bad loans of Bear Stearns’, wanting JP Morgan to purchase Bear in hopes of preventing bankruptcy and jeopardizing the global financial system. On March 18th the FOMC lowered the fed funds rate yet again, this time by 0.75% to 2.25%, halving it in six months and putting pressure on the dollar.
On the same day, regulators let Fannie Mae and Freddie Mac buy $200 billion in subprime mortgage debt from banks. The Federal Housing Finance Board also authorized the regional Federal Home Loan Banks to assume another Fannie and Freddie Mac guaranteed $100 billion in subprime mortgage debt.
This move only further destabilized the two mortgage giants, as the Fed Chair and U.S. Treasury Secretary had underestimated how bad things actually were.
Fed Lowers Rate and Buys More Toxic Debt
On April 7th and 21th, the Fed adds another $50 billion per bank through its Term Auction Facility (TAF). And on April 30th, The Federal Market Open Committee drops the fed fund rate to 2%.
By May 20th the Fed auctioned $150 billion more, through the TAF, and by June 2nd the total auctioned was at $1.2 trillion. In June they lent another $225 billion through TAF, and just like that what was supposed to be a temporary measure, turned out to be a seemingly permanent attempt at a fix.
IndyMac Bank Fails
The Office of Thrift Supervision closed IndyMac Bank on July 11th, as Los Angeles police had to restrain an angry mob of about 100 people who were making a run on the bank in fear of losing their deposits.
On July 23rd, Paulson turned to the media and explained the need for a bailout of Fannie Mae and Freddie Mac, who alone were holding nearly half of the $12 trillion of the nation’s mortgages. He also went on to assure the listeners/viewers that the banking system was solid, despite the fact that other banks may also fail in the near future.
By July 30th the U.S. Congress passed the Housing and Economic Recovery Act, giving the Treasury the authority to cover as much as $25 billion in loans held by Fannie and Freddie. They also created a new regulator for the two agencies, called Federal Housing Finance Agency. Congress also allowed for $15 billion in housing tax breaks, $300 billion in FHA loan guarantees, and $3.9 billion in housing grants.
Treasury Nationalizes Fannie and Freddie
The Federal Housing Finance Agency (FHFA) places Freddie Mac and Fannie Mae under conservatorship, basically the government taking the reins. The FHFA then let the Treasury buy preferred stock of the two entities to keep them afloat.
The two were also allowed to borrow from the Treasury, and naturally, the Treasury was allowed to buy their mortgage-backed securities. This bailout ended up costing the U.S. taxpayers $187 billion, though the two entities have paid back all of the $187 billion plus another $58 billion in profit to the fund.
Lehman Brothers Bankruptcy Triggers Panic
Secretary of the Treasury, Henry Paulson urges Lehman Brothers to try and find a buyer, though in reality there were only two buyers: Bank of America (BOA) and British Barclays. BOA wanted the government to foot the losses upwards of $65 billion on the deal but Paulson said no, as the Treasury had no legal authority to do so at the time.
Barclays stated that British regulators would not approve of them buying Lehman Brothers. With the Fed not guaranteeing a loan as it did with Bear Stearns, Lehman’s had no choice but to declare bankruptcy, sending a shockwave through the financial world.
The Dow Jones dropped 504 points, the worst in 7 years, oil tanked, and U.S. Treasuries went up as investors were scramming in search of safety. Later in the same day, Bank of America declared they would buy the struggling Merrill Lynch for $50 billion.
Fed Decides to Buy AIG for $85 Billion
The American International Group Inc. (AIG), who had insured trillions of dollars of mortgages across the globe, after taking cash from ultra-safe insurance policies and speculating with them, was pleading with the Fed for emergency funding.
Luckily for them, some placed an AIG bankruptcy on par with the fall of the entire global banking system, and on October 8th the Fed lent AIG’s subsidiaries another $37.8 billion in exchange for fixed-income securities. On November 10th, the Fed revised it’s aid to AIG, reducing the initial $85 billion loan down to $60 billion, and the $37.8 billion loan was repaid.
Then the Treasury ended up purchasing $40 billion of AIG’s preferred shares, which allowed AIG to navigate through the stormy waters by retiring it’s credit default swaps, safeguard the government initial investment, and most importantly avoid bankruptcy.
Economy Almost Collapsed
The Lehman Brothers’ bankruptcy caused investors to flee the place companies kept their short-term cash, money market mutual funds.
On September 16th, the Reserve Primary Fund didn’t have enough cash to pay out all the redemption requests. On September 17th things got worse. Investors withdrew a record $172 billion out of their money market accounts, versus a typical $7 billion during normal times.
If that had went on, companies would not be able to get money for their day-to-day operations. In a few short weeks, grocery stores wouldn’t have had food to stock the shelves as shippers wouldn’t have had the cash to make the deliveries. It was that close!
Paulson and Bernanke Meet with Congress
The Treasury Secretary and the Fed Chair stun the Congress and the nation by explaining the current state of affairs. Credit markets were reportedly just a few days away from going under.
Bernanke calmed the markets enough to keep the economy flowing by announcing that the Fed would bail the banks out, and lend money as needed to banks and businesses, to keep them from pulling out their money market funds.
This gave birth to one of many poorly named innovative programs of the Fed, the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility.
Treasury Submits Bailout Legislation to Congress
The time for a bail out had come. Henry Paulson submits a three-page document asking the Congress to approve a proposed $700 billion bailout.
These funds would allow the Treasury to buy up mortgage-backed securities headed for default, taking them off the books of the banks, hedge funds, pension funds, and other big players. When pressed on what would happen if the bailout wasn’t approved, Paulson said, “If it doesn’t pass, then heaven help us all.”
Barney Frank Negotiations
In search of government protection, two of the most iconic and successful investment banks on Wall Street, Morgan Stanley and Goldman Sachs, applied to become regular commercial banks.
On September 23rd, Chairman of the Housing Financial Service Committee, Congressman Barney Frank, worked to negotiate a plan that would cost the tax payers less and offer more protection in return. The final bailout bill would incorporate his measures.
Washington Mutual Bank (WaMu) Goes Bankrupt
As a result of insufficient funds to run its business caused by panicked depositors withdrawing $16.7 billion in just 10 days, Washington Mutual Bank went bankrupt. Subsequently the Federal Deposit Insurance Corporation took over and the bank was sold to J.P. Morgan for a cool $1.9 billion.
Stock Market Crashes as Bailout Rejected
The rejection of the bailout bill by the U.S. House of Representatives sent the stock market crashing. The opponents of the bill rightfully saw it as bailing out Wall Street’s gambling debts at the expense of the American taxpayers.
Some argue that these opponents hadn’t realized that the global economy was on the line. Whether or not that’s true, the stock marker realized what was at stake. The Dow Jones plunged 770 points, the most in a single day in history. Global markets followed with Brazil’s Bovespa dropping 10%, London Stock Exchange dropped 15%, oil dropped to $95 per barrel and gold shot up to over $900 an ounce.
In hopes of restoring financial stability, the Fed doubled its currency swaps with central banks across Europe, Japan, and England to $620 billion. The world government were now trying to navigate the storm and coordinate measures to provide liquidity for frozen credit markets.
Congress Passes the $700 Billion Bailout Bill
Too big to fail prevails. The bank bailout bill is passed, allowing the Treasury to buy shares of troubled banks. It was deemed as the swiftest way to inject money into a frozen financial system.
The Troubled Asset Relief Program funds also helped bail out auto companies and AIG, restoring credit markets and helping homeowners avoid foreclosures.
Despite Central Bank Action, Global Stock Markets Collapse
Despite the bailout bills injecting capital and restoring liquidity, stock markets across the globe proceeded to plummet. Because all the bailouts could do is keep the machine operating, they couldn’t make the banks trust each other again, at least not right away.
$1.7 Trillion Commercial Loan Program
The Fed agrees to issue short-term loans for companies that can’t get them elsewhere, allowing businesses to have enough cash to stay operational, charging 2% to 4% in interest on them, and buying primarily high-quality three-month debt.
Many companies sign up including Morgan Stanley, Ford Motor Credit, GMAC Mortgage LLC, and General Electric’s finance arm.
Central Banks Coordinate Global Action
On October 8th, in an attempt to lower LIBOR, the central banks of the United Kingdom, European Union, Sweden, Switzerland, and China joined the Federal Reserve in cutting their rates. China cut their rate by 0.27% and the rest by half a point.
This did cause bank lending rates to drop in return. On October 14th, the U.S., Japan, and the EU took further action, with the EU committing to spend $1.8 trillion in bank financing guarantees, and take other steps to get banks back to lending to each other, including buying shares of banks in order to prevent them from failing.
Also the U.K committed $88 billion to buy shares of failing banks and another $428 billion to guarantee their loans. The Bank of Japan simply wrote a blank check and promised to lend unlimited dollars whilst suspending its bank stock selling program.
And the European Union asked the U.S. to tighten their banking regulations and wanted the International Monetary Fund to play a bigger role in the process. As a result of this coordinated effort, Henry Paulson changed how we would use TARPs, switching from buying toxic mortgage debt from the banks to purchasing equity ownership in the major banks.
Fed Lends $540 Billion to Bail Out Money Market Funds
The money market is where most businesses hold their cash overnight, cash that is necessary to continue operations. At this point, as of August, over $500 billion had been taken out from money markets as a result of the continued redemptions.
So the fed infused another $540 billion in loans to keep the money market from drying up. The Fed’s Money Market Investor Funding Facility (MMIFF) said it would purchase around $600 billion of bank notes, certificates of deposit, and commercial paper that were maturing in 90 days or less. On October 29th, the
The Fed Lowers Rates to 0.25 and Zero
The FOMC went as low as it had ever gone in it’s history, dramatically decreasing the fed funds rate to “between 0.25 points and zero.” It also dropped the discount rate to 0.5 percent, and with that the Federal Reserve couldn’t lower the rates any further (or could they?), and was at the mercy of using other tools at it’s disposal as well as creating some new ones.
Auto Companies Request Bailout, Fed Creates Term Asset-Backed Securities Loan Facility
Next up it the auto industry’s turn to ask for some money. On November 18th, Chrysler, Ford, and GM sought $50 billion in bailouts. The fact that the CEOs flew to D.C. in private jets did not help their cause in the eyes of the public, nor in the eyes of the Senate Majority Leader Harry Reid who advised them to, “return with a responsible plan that gives us a realistic chance to get the needed votes.”
By November 21, the FDIC guaranteed up to $1.3 trillion in inter-bank loans, and around 1.2 million unemployed people got an extra three months of benefits. Then, on November 25th the Treasury and the Fed team up to utilize the TARP to try and inject liquidity into the frozen consumer credit market that involved auto loans, student debt, and credit cards.
On the same day, the Treasury infused Citigroup with $20 billion in cash, in return for $27 billion in preferred shares yielding 8% annually as well as additional warrants for the right to buy no more than 5% of Citi’s common stock at $10 each.
On November 26th, the 30-year fixed mortgage rates fell from 6.38% to 5.5% as a result of the Fed announcement to buy $800 billion in mortgage-backed securities from Fannie Mae and Freddie Mac.
Zero Interest Rates, TARP, and Big 3 Bailout
In return for preferred stock, on December 19th the Treasury injected another $105 billion in TARP funding into eight banks. In return the government was to receive a 5% dividend, which was to increase to 9% over time.
The banks would go on to buy the government out as soon as things got back to normal. Also in December, the Big Three Automakers, Ford, GM, and Chrysler asked for a $34 billion bailout. The next month, they would get $24.9 billion.
Congress approves a $787 billion economic stimulus package
On February 13th, Congress approved a stimulus package aimed at boosting economic growth by granting $288 billion in tax cuts, $275 billion for ‘shovel-ready’ public works, and $224 in unemployment benefits.
A $8,000 first time home-buyers tax-credit was also included, as well as a sales tax deduction on buying new cars and a $2,500 college tuition credit. The American Recovery and Reinvestment Act provided $54 billion in tax write-offs to small businesses, extending unemployment benefits through 2009 and suspending taxes on them.
The Homeowner Affordability and Stability Plan
On February 18th, then President Obama announced a $75 billion effort to help stop foreclosures, through a program called The Homeowner Affordability and Stability Plan, aimed at helping 7 to 9 million Americans restructure and refinance their mortgages to avoid foreclosure.
Incentivizing borrowers with $1,000 a year in principal payments if they stayed current on their mortgages, the $1,000 payments were pulled from the Troubled Asset Relief Program funds.
The Bureau of Economic Analysis Revises GDP Growth to -6.3%
Initially reporting a negative 3.8% GDP growth rate in it’s 2008 Q4 report, the The Bureau of Economic Analysis revised its U.S. gross domestic product growth rate to a negative 6.3%. This was marked as the worst GDP figure since Q1 of 1982, when the GDP dropped 6.1%. Economic growth for all of 2008 was a painful -0.1%.
The Dow Drops to 6,594.44
On October 9th 2007, the Dow peaked at 14,164.53, marking the March 5th landing as a 53.4% drop, and making it the worst drop of any other bear market since the Great Depression of 1929.
Launch of The Making Homes Affordable Program
In an effort to help struggling homeowners avoid foreclosure and stimulate the housing market, the government launched a new program, a part of which allowed 2 million homeowners who were ‘upside down’ on their houses to take advantage of lower mortgage rates and refinance. By 2016, this program had been utilized by 3.3 million people.
10% Unemployment Rate the Worst Since 1982
A near 6 million jobs gone in the year leading up to October, employers kept offering temporary positions instead of full-time work, afraid of what the future may hold.
As is typical during recessions, the field of healthcare and education expanded, due to some going back to school for new skills and others getting ill from the constant stress they were dealing with.
The saga doesn’t necessarily end here, but it’s a good place to stop. After all, it is nearly 5 months after the Time magazine declared “More Quickly Than It Began, The Banking Crisis Is Over.” But was it really?
Note on the numbers used in the article: In an effort to paint a fuller picture, the figures in this article were aggregated from numerous credible sources.
Parting Words
Derivatives in the mortgage market were one of the primary causes of the 2008 Financial Crisis. Derivatives can be used to either hedge existing investments, or to speculate on various markets such as interest rates, commodities, credit, equities, etc. While they can serve to mitigate portfolio risk, the widespread trading of derivatives can obliterate an institution that are highly leverage and experience a dramatic adversity in their derivatives positions. As is evident from the above timeline.
Some people argue the governments should have let the free-market do it’s thing and let the big banks fail, other argue that the governments had no choice but to step in. The latter argued that the government intervention eventually stopped bank credit panic, returned LIBOR back to normal, and re-ignited liquidity in the credit markets.
Whatever your take on it is, we hope the above 2007-2009 Financial Crisis timeline will help you re-examine those gloomy days that put the world on hold. At the time it was the worst thing our generation had ever seen, but then we were introduced to the COVID pandemic in 2020.
Sources
[1] Wikipedia [2] BLS.gov [3] NBC News [4] CNBC News [5] FederalReserve.gov: Statement on Working with Mortgage Borrowers [6] HousingWire.com [7] FederalReserve.gov: Recent Events in Financial Markets
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