1. 10 years of global financial crisis: Timeline of key events and how it unfolded – Part 1

10 years of global financial crisis: Timeline of key events and how it unfolded – Part 1

Ten years ago this month the initial shocks started to appear across banks, financial service firms and market regulators. In this first part of a two-part series, we look at the key events leading up to the loud bangs that let the world knew that a global financial crisis was here.

By: | Updated: August 24, 2017 12:22 AM
For most of the Americans, the financial crisis marked a heavy damage ranging from job losses to the collapse of the economy. (Image: Associated press)

Ten years ago this month the initial shocks started to appear across several organisations, banks, financial service firms and market regulators. The global financial crisis, which is believed to have lasted from mid 2007 to late 2009, was the worst and biggest credit crunch since the great depression of the 1930s. For most of the Americans, the financial crisis marked a heavy damage ranging from job losses to the collapse of the economy.

In March 2009, most of the global stock markets plummeted to the levels last seen three years before it. In October 2009, the unemployment rate in the United States rose to 10% for the first time since 1982. We take a look at the key events that told the world that there is a crisis going on.

Jump to Part 2: 10 years of global financial crisis — Timeline of key events and how it unfolded

Early shockwaves: February-July 2007

The initial signs of troubles were mostly missed by various stakeholders in the financial system. In February, Freddie Mac — the American federal home loan mortgage company — announced that it would no longer buy riskiest subprime mortgages and mortgage-related securities. In April, New Century Financial Corp, one of the leading subprime mortgage lenders, filed for bankruptcy. The leading credit research firms, Standard and Poor’s and Moody’s Investor Services downgraded over 100 bonds backed subprime mortgages in June. However, in the same month, the Federal Open Market Committee (FOMC) voted to maintain its target for the US Federal Reserve’s key policy rate at 5.25%.

Bear Stearns, one of the top investment banks in the US, informed investors that it would suspend redemptions from a fund investing in subprime bonds. Following this, Standard and Poor’s placed 612 securities backed by subprime residential mortgages on a credit watch. Meanwhile, insurance company Countrywide Financial Corp warned of “difficult conditions”. Later, American Home Mortgage Investment Corp filed for bankruptcy in July.

BNP Paribas: August 2007

Another trouble struck the financial markets when France’s largest bank BNP Paribas halted redemptions on three of its investment funds. The bank said it had not valued the underlying assets of the CDO (collateralised debt obligations) instruments. The subprime assets on which the so-called CDOs were made became worthless when borrowers defaulted. Amid all this, the FOMC still voted to maintain its target for the US Fed’s policy rate at 5.25%.

Northern Rock: September 2007

The UK’s Chancellor of the Exchequer authorised Bank of England to provide liquidity support for Northern Rock — the country’s fifth-largest mortgage lender. The credit crunch hit with full force when Northern Rock suffered the first run on a British bank since 1866. After two failed takeover offers, and with the continuing weakness in the financial system, Northern Rock was taken under state ownership by the Treasury of the United Kingdom in February 2008.

US Federal Reserve Building. (Image: Reuters)

Regulator springs up

September 2007: The FOMC voted to reduce its target for the US Federal Reserve’s policy rate by 50 basis points to 4.75%.

October 2007: The FOMC again voted to cut its target for the federal Reserve’s rate by 25 basis points to 4.5%.

December 2007: The FOMC recommended yet another rate cut, voting to reduce its target for the federal reserve’s policy rate by 25 basis points to 4.25%.

January 2008: Meanwhile, Bank of America announced that it would purchase Countrywide Financial in an all-stock transaction worth approximately $4 billion. FOMC moved quickly, and in its continuing efforts to spur lending, it voted to reduce its target for the US Fed’s policy rate by a huge 75 basis points to 3.5%. Again in the same month, FOMC voted to reduce its target for the Fed rate by another 50 basis points to 3%.

Rescue mission

President George W Bush signed the Economic Stimulus Act of 2008 into law in February 2008. Following this, in March 2008, the Federal Reserve Board announced the creation of Term Securities Lending Facility (TSLF), which would lend up to $200 billion of Treasury securities for 28-day terms against federal agency debt, federal agency residential mortgage-backed securities (MBS). In the same month, the FOMC voted to reduce its target for the US Fed’s key policy rate by 75 basis points to 2.25%.

(Image: Reuters)

Bear Stearns taken over: March 2008

Global investment bank Bear Stearns was highly active in the securitisation process and had issued a large number of asset-backed securities. The Federal Reserve Bank of New York announced that it would provide term financing to facilitate JPMorgan’s acquisition of The Bear Stearns Companies Inc. The Federal Reserve was afraid that the trillions of dollars on Bear Stearns’ balance sheet would become worthless and could possibly spark a global panic, if it doesn’t step in. Bear Stearns was bought by JPMorgan for $240 million — for a price of a measly $2 per share on 14 March 2008.

A breather and a short breath

April 2008: FOMC voted to reduce its target for the US Fed’s policy rate 25 basis points to 2%. Meanwhile, the International Monetary Fund (IMF) also predicted potential losses in the trillions of dollars.

June 2008: FOMC voted to keep its target for the US Federal Reserve’s interest rate at 2%.

July 2008: The Securities Exchange Commission (SEC) issued an emergency order temporarily prohibiting naked short-selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks.

August 2008: The FOMC again voted to maintain its target for the US Fed’s key policy rate at 2%.

Fannie Mae and Freddie Mac: September 2008

Difficulties started surfacing at giant US government-backed mortgage buyers Fannie Mae and Freddie Mac. The Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac in government conservatorship. By 7 September 2008, the US government was forced to bail out the two entities.

Lehman Brothers filed bankruptcy on 15 September 2008. (Image: Associated Press)

Lehman Brothers collapse: The doom of 15 September 2008

For many, the bugle of the global financial crisis was sounded by the fall of the United States’ fourth largest investment bank Lehman Brothers. In September, Bank of America announced its intent to purchase Merrill Lynch & Co for $50 billion. Later in the day, the unimaginable happened as Lehman Brothers filed for bankruptcy after potential buyers walk out of the deal. The panic was at a high throughout the world markets, especially as Lehman Brothers had assets worth $639 billion, which were inter-dependable on other major banks too.

The very next day the Federal Reserve was forced into an $85 billion bailout of the American International Group (AIG). On its part, the SEC announced a temporary ban on short selling on all of the financial sector stocks. The FOMC voted to maintain its target for the US Federal Reserve’s key policy rate at 2%.

Read Part 2 to know about the hectic events that followed soon after the fall of Lehman Brothers during the course of the global financial crisis.

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  1. Suresh Deman
    Aug 22, 2017 at 12:34 pm
    On the demand side, in the 2000s, the adjustable rate mortgage (ARM) or variable rate (VR) loans (carried a lower teaser rate), in the first 2 to 3 years jumped to a much higher level, subsequently flourished. Borrowers counted on equity in buildings and credit during the low interest rate period and then replacing the ARM by a low fixed rate in the prime market. But this only worked during an economic boom. If house prices crashed, no equity is being accumulated, and the jump in the interest rate threw the borrowers into default as well. The Wall Street hurricane thus reached the High Street and given the derivatives traded globally, financial ins utions in countries with the weak regulatory system also became invested in them making the local crisis, a global crisis. However, the above Pangariya and Reddy kind of analysis gives us a superfluous explanation of the crises as they do not seem to accept that the crises were systemic of the market economies rather than system
    1. Suresh Deman
      Aug 22, 2017 at 12:32 pm
      As uncertainty kept on increasing, CDSs market exploded and reached over $50 trillion. Given Lehman Brothers’ default after defaults on other derivatives, AIG had to make good on CDSs worth multi-billion dollars. Mody had to make a downward adjustment in its credit rating, which necessitated an additional $14.5 billion in collateral, sealing the fate of AIG. The sequence of events left all financial ins utions unwilling to part with their liquid assets unless they need them to cover cash shortage caused by defaults on their assets. They also began pulling out investments elsewhere including in the emerging market economies to raise cash. The financial markets were frozen completely and even firms selling cars, furniture, and other durables goods found themselves out of lenders adding fuel to the fire. On the demand side, in the 2000s, the adjustable rate mortgage (ARM) or variable rate (VR) loans (carried a lower teaser rate), in the first 2 to 3 years jumped ..
      1. Suresh Deman
        Aug 22, 2017 at 12:31 pm
        However, as the housing market started declining, returns on the derivatives began to exhaust and this undermined the Lehman Brothers’ capacity to service and refinance the short-term debts. This contributed to its eventual default and it had a great deal of impact on the balance sheet of Lehman Brothers’ lenders who were holding commercial paper and thus made them vulnerable to more default. Further, the credit default swap (CDS) added an additional important dimension to the financial crisis that provided insurance against the risk of default in return for a premium. Those who were holding Lehman Brothers’ commercial paper could go to the American Insurance Group (AIG) and buy CDSs from it in case Lehman Brothers defaulted. In fact, even those not holding the commercial paper but wishing to bet against Lehman Brothers could buy such CDSs. As uncertainty kept on increasing, CDSs market exploded and reached over $50 trillion.
        1. Suresh Deman
          Aug 22, 2017 at 12:28 pm
          The financial market took this process of securitization one step forward and a financial ins ution would take bonds of middle level seniority (BBB) belonging to different MBSs and packaged them into a collateralized debt obligation (CDO). This mechanism then would allow them to issue and sell secondary CDOs of different seniority and returns along the lines of bonds based on MBS. This was an indirect way to improve the ratings as Ratings agencies would give the secondary CDOs of highest seniority rating (AAA). In accentuating the crisis, next stage is the leveraging of investments. For every dollar invested in MBSs, CDOs or other derivatives, Lehman Brothers borrowed $30 from the market by selling the short-term commercial paper. Since short-run interest rates were significantly lower than the return on mortgage-backed derivatives, it could service the debt on the commercial paper and still make a great deal of profit. However, as the housing market started declining, returns on
          1. Suresh Deman
            Aug 22, 2017 at 12:27 pm
            A financial ins ution buying mortgages did not just hold them, but it packaged mortgages of varying risks and returns into a mortgage-backed security (MBS) and parceled it into bonds of smaller denomination of different seniority and returns. For example, consider an MBS backed by $20 million worth of mortgages. The ins ution would identify five levels of seniority with associated risk and return and issue 4,000 bonds of each type with the face value of $1,000 each. The Bonds with the highest seniority rated as AAA by rating agencies would receive the lowest return and also bear the lowest risk of default. Higher the level of seniority bonds lower is the risk and would have the next lowest risk and return. Bonds with near the lowest level of seniority received junk rating. If there was a default on some of the mortgages underlying the MBS, the lowest seniority bonds would be the first to stop receiving returns. Securitization process thus produced some AAA rated bonds
            1. Suresh Deman
              Aug 22, 2017 at 12:26 pm
              In the housing market there are two classes of borrowers, prime and subprime and three types of Banks, Central Commercial Banks (Federal Reserves, Bank of Scotland, RBI State Banks) Retail Banks (SLA, Cooperative Banks Building Societies) and Investment Banks (Lehman Brothers, JP Morgan, Gorman Sacks, City Group, etc). The former of borrowers exhibiting low risk of default due to good credit history and the latter high risk due to past defaults or low and unstable income. Banking regulations forbid commercial banks from lending to borrowers at subprime rates. Instead, brokers and mortgage companies who often are affiliated to banks and other prime lenders, lend them mortgages at interest rates 2-3 higher than the interest rate in the prime market. Due to the economic boom in the housing market, residential subprime mortgages increased from less than $100 billion in 1995 to $1.5 trillion by 2006 and cons uted 15 of total mortgages. On the other hand, Adjustable Rate Mortg
              1. Suresh Deman
                Aug 22, 2017 at 12:25 pm
                In sharp contrast, the reasons identified for the US financial crisis engulfing the whole global financial and economic system boil down to a single cause relating to a complete failure of the financial market regulatory mechanism due to the complicity between the regulatory authorities and dubious financial ins utions operating through “shadow financial economy” based on illegal speculative transactions of complex financial instruments, indirectly placing the risky mortgages on the balance sheets around the world. However, the moot point seems to be whether any lessons have been learnt from the crisis, and efforts made to revamp the global financial architecture by plugging the loopholes, or as it seems now, that again there is business as usual, as could be seen in the revival of risky financial dealings by the same financial ins utions that were responsible to cause the global financial collapse. Defaults in the housing market had a significant impact on all those holding these.
                1. Suresh Deman
                  Aug 22, 2017 at 12:23 pm
                  I am disappointed the analysis is extremely superfluous. Causes of Financial Crises Since the meltdown of financial markets began in 2008, 130 banks have failed in the United States alone. To understand the dynamics of this crisis one has to look into retrospect. In 1980s and early 1990s, the United States witnessed 750 Savings and Loans Associations (some of which owned by Bush family) failing. SLAs specialized in accepting deposits and expanding residential mortgage loans. Deregulation in early 1980 under Regan-Thatcher ear allowed them to lend to increasingly risky borrowers who defaulted on the loans once housing bubbles busted. However, the SLA crisis remained local and with government support successfully rescued the depositors for just $120 billion in taxpayers’ money.
                  1. S
                    Aug 22, 2017 at 10:49 am
                    As an aside this was signed,soon after the so-called "indo-US Nuke Deal" was signed.The USA was pressing the UPA to sign it "QUICKLY". Derivatives and fraudulent ratings by Western rating,agencies are reported to be two of the many reasons.The former,namely derivatives have not been solved,as yet.Central banks are unable to raise rates as,the derivatives will Crash the Global Finance and Economy,many times 208.Global Bond markets are also in trouble due to the derivatives.Please google for:- The 1.5 Quadrillion derivatives bomb
                    1. G
                      Aug 22, 2017 at 9:36 am
                      Dear FM PM about this crises also are U going to blame World ? and previous UPA government in India , As BJP and present government's Standard dialog previous Govt and Nehru Indira not done any thing last 50 years , What so ever happening Maine Kiya by Modi and BJP party gang-men, Tota Maina ki Kahani , certainly you are doing divide rule politics with so many corrupt ministers of Nitish in Bihar and by supporting Aya ram gaya rams in party on whom serious charges ,Throw away candidates by Congress and other parties you all are lifting from street to achieve number game by killing democracy of India .
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