2014 Cambridge Conference Business & Economics ISBN : 9780974211428
1
Roger W. Clark 2
Austin Peay State University
P.O. Box 4415
Clarksville, TN 37044
United States of America
Phone: 931-221-7574
Email: clarkr@apsu.edu
Yu Zhang
Assistant Professor of Finance
Eastern Michigan University
420 Owen
Ypsilanti, MI, USA 48197
Phone: 734.487.1350 yzhang15@emich.edu
George C. Philippatos
University of Tennessee
Professor of Banking and Finance (Emeritus)
Knoxville, TN 37996-0540
United States of America
Voice: 865-690-9684
Email: gcphilipp1@gmail.com
1 The authors wish to acknowledge the assistance of Shao Kan at Eastern Michigan University for his help in researching this paper, specifically in the Sector of REITS.
2 Corresponding Author
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2014 Cambridge Conference Business & Economics ISBN : 9780974211428
Roger W. Clark, Austin Peay State University
Yu Chang Eastern Michigan University
George Philippatos, University of Tennessee Knoxville
A bubble is defined as a self-reinforcing increase in asset values to levels not justified by the fundamentals of the economy, as measured by some generally accepted paradigm (e.g. CAPM in its various forms). Bubbles can occur in financial markets without investors ever behaving irrationally, once the limitations of their knowledge is accounted for (Cooper, 2008). Financial asset price bubbles have been documented by many researchers, most notably by the recent Nobel Prize winner, Robert Schiller 3 .
Such findings question the efficient markets notion that rational speculators always stabilize prices. In fact, according to research “…They are consistent with models in which rational investors may prefer to ride bubbles because of predictable investor sentiment and limits to arbitrage (Brunnermeier and Nagel, 2004). When rational investors prefer to ride the bubble for long periods of time, the selfreinforcing feedback effects may convert the bubbles to a wobble of instability, with serious consequences for the financial sector, and perhaps the entire economy.
While the results or M.K. Brunnermeier and S. Nagel focused on “Hedge Funds and the
Technology Bubble” there is some recent evidence about the “Synchronization risk” where rational arbitrageurs “time the market” rather than correct the mispricing right away. This leads to “delayed arbitrage” which prolongs the life of the asset bubble (Abreu and Brunnermeier, 2002)
This paper proposes that what we commonly define as a stock bubble is actually a series of small bubbles as seen from the individual corporate basis. It is only when companies that are mispriced are placed on a sector of the economy do we see a classic “asset bubble”. While it would be very difficult for one speculator to attack an entire sector of the economy that is mispriced as it would involve a great deal of synchronization, two or more well-endowed speculators could attack and cause a panic in individual stocks and make a profit with the ensuing panic. Then they go to another, picking off the low hanging fruit until the entire sector collapses. This is similar to the board game “Jenga” where each
3 The existence of bubbles and bursts has also been documented by Andrew Ross Sorkin. Ross Sorkin analyzes the cases of Bear Stearns, Lehman Brothers , Merrill Lynch, Bank of America, and AIG among others. He focuses mercilessly on the machinations of the major characters to save the system and themselves.
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2014 Cambridge Conference Business & Economics ISBN : 9780974211428 player takes one part of a structure out. The loser is the one that collapses the structure with his/her pick.
In the crash of ’08 the blame primarily went primarily to the real estate industry. This bubble lasted several years. It would seem inconceivable that speculators did not realize that there was a bubble in this area. We would expect then, that the afore-mentioned self-reinforcing feedback effects converted this bubble into a wobble. We would also expect speculators would have been busily raiding individual companies before the wobble burst. This paper investigates the possibility that speculators behave in this manner to deflate the wobble before it bursts.
In the seminal paper of Abreu and Brunnermeier a key assumption was that one rational trader cannot alone correct a mispricing in the market. This paper can take as a given that while it is true that one trader cannot correct broad mispricing in the markets, traders do not trade “the market”. They trade individual company securities. Further, the actions of George Soros and Quantum Capital in
Thailand seem to verify that under the proper circumstances one large arbitrageur can indeed bring down an entire monetary system (Stiglitz, 2002).
General Methodology and Databases
Should it be the case that traders are selecting individual companies to raid before a bubble bursts we should see evidence of it in a group of companies that have strayed in mispricing from their fundamentals. To test for this we will be taking companies by SIC code in the areas of construction and home sales and testing their mispricing against their individual fundamentals before the bubble burst and slightly before the bursting of the bubble. We should see some companies that return to their fundamental price before others in the same industry as they are raided by individual wealthy speculators. This could be a useful tool for judging the imminent bursting of a bubble.
The data utilized for out tests will be monthly observations from the CRSP database, as well as the Case-Schiller House Pricing Index and other published data sources. For wealthy speculators we may resort to Hedge-Fund data. All told the data bases will encompass the period of the market crisis from
2001 to 2011, where available. In addition to the standard databases we have also utilized information about several classes of Real Estate Investment Trusts (REITs) for several categories and segments.
All told, our results support weakly the existence of stock bubbles and point to the formation of asset bubbles when the results are segmented three sequential periods: (a) the Accumulation period;
(b) the peak period; and (c) the bubble pre-burst period.
Because of the vast databases the present research focuses on the sub period August 2005 to
August 2006. This sub period is more convincing since housing prices were still increasing even though the bubble burst in December of 2007. The results and explanations are codified by two appendixes.
Appendix (A) presents the real estate industry descriptions classified by SIC codes. Particular attention is given to the three major categories and the eight subcategories of Real Estate Investment Trusts (REITs).
Appendix (B) is a timeline of news events that may have affected the financial markets.
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In a future versions of our research we shall encompass the entire database from August 2005 to the present and compute both financial returns and cumulative returns for the entire period.
Specific Methodology and Results
For this paper we used the Case-Shiller 20-city composite home price index, Jul04 – Dec07.
This measures sales price of existing single-family houses in 20 metropolitan areas in the U.S. The index reached its peak at 206.52 in July 2006. Based on the trend of the 20-city home index and the market news, the timeline is separated into three periods: accumulation period from July 2004 to July 2005; peak period from August 2005 to July 2006; and pre-burst period from August 2006 to February 2007.
To be conservative, we used the peak of the housing price as a bench mark, which is earlier than the stock market peak. Since housing prices were still climbing before July 2006, it will be harder to argue that the market burst before that time. So if we can find evidence that some stocks were attacked before the housing price peak, it is more convincing that rational investors have realized the potential bubble ahead of the bust.
We chose Feb, 2007 as the endpoint of pre-burst period for three reasons:
1) New Century Financial Corporation, the largest U.S. subprime lender, filed for chapter11 bankruptcy in April 2007. The company had problems in March but filed in April. To avoid arguments, we put the endpoint one month early, Feb. 2007
2)
In the ABI database, when search “subprime” or “mortgage” or “crisis”, there were two news items in Jan 07 and nine in Feb 07 and 88 in March 07, 46 in April 07, 24 in May
07, 49 in June 07, 108 in July 07, 340 in August 07 and 319 in September 07. Therefore,
Feb 2007 is chosen.
3) These two cut-off points match the local peak and trough in the stock market below, except Feb 07 is one month earlier than the local drop in S & P 500.
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Figure 1 Price Change by Portfolios in Accumulation Period: Jul04 – Jul05.
Based on the geometric mean returns over the accumulation period from July 2004 to July 2005, five portfolios were formed with the highest return (P0) to the lowest (P4). The rank remains the same over the period. Figure 1 shows the monthly average price trends of all five portfolios. Price is the unadjusted price.
If the price is not available then the mid-point of the highest bid and lowest ask is taken as the price of that month.
1) All portfolio prices remain stable or increasing over the first period. No significant price drop is observed. There is no obvious evidence that the market identified potential overpricing at this stage, or potential bubble is still in accumulation and stocks are not substantially overpriced.
2) The price of the highest return portfolio has much higher prices compared to the other portfolios and its price increases the most in the period.
P4 composition in three periods. The components of P4 in three time periods are investigated.
Panel A demonstrates the number of firms in P4, percentage of P4, and percentage of that industry. Panel B shows the number of firms in P4, percentage of P4, and percentage of that segment in REITs. P4 is the portfolio with the highest geometric mean return in the period, which is the bottom 20% of the stocks in the real estate section. Period 1 is the accumulation period from July 2004 to July 2005; Period 2 is the peak period from August 2005 to July 2006;
Period 3 is the pre-burst period from August 2006 to February 2007.
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Firm
Number
Period 1
% in
Portfolio
% in
Industry
Firm
Number
Period 2
% in
Portfolio
% in
Industry
Firm
Number
Period 3
% in
Portfolio
% in
Industry
Panel A: By Industry
Operative Builders
General Contractors
Mortgage Bankers and
Loan Correspondents
Real Estate Agents and
Managers
Title Insurance
0
0
11
3
0
0.00%
0.00%
5.66%
0.00%
0.00%
0.00%
20.75% 78.57%
42.86%
0.00%
15
6
5
5
1
26.79% 93.75%
10.71% 60.00%
8.93%
8.93%
1.79%
33.33%
50.00%
16.67%
7
1
4
2
0
14.29% 35.00%
2.04% 33.33%
8.16%
4.08%
0.00%
40.00%
20.00%
0.00%
All REITs
Panel B: Segments in
REITs
Mortgage_Home
Financing
Mortgage_Commercial
Financing
Residential_Apartment
Residential_Manufactured
Home
39
13
3
0
2
73.58% 18.14%
33.33% 56.52%
7.69%
0.00%
5.13%
25.00%
0.00%
40.00%
24
8
2
1
1
42.86% 10.81%
33.33% 32.00%
8.33%
4.17%
4.17%
14.29%
4.55%
20.00%
35
11
3
6
2
71.43% 17.50%
31.43% 45.83%
8.57%
17.14% 33.33%
5.71%
27.27%
40.00%
Other REITs
Table 1
21 53.85% 13.91% 12 50.00% 7.69% 13 37.14%
This table is quite interesting as it shows the composition of the stocks in the real estate
9.15% industry before the bubble burst. Here there is found evidence of attacks within several sectors of the industry:
1.
No stocks in operative builders and general contractors industries performed in the bottom 20% of real estate sector, but, they did in the second period.
2.
Almost all Mortgage Bankers and Loan Correspondents (78.57%) performed in the bottom 20% in the real estate sector. Even in periods 2 and 3, they still had a big proportion in the worst performing portfolio.
3.
More than half of the REITs invested in the home financing mortgage (Mortgage_home financing) belong to the bottom performing stocks. The number also remained higher than other segments in REITs through period 2 and 3.
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Figure 2
Price and Short Interest Ratio Co-movement of P4 (Low) in the Peak Period: Aug05 – Jul06. This figure 2 shows the co-movement of the monthly average price and short interest ratio (SI) of portfolio 4 from August 2005 to July 2005. Portfolio 4 is the portfolio with lowest geometric mean return in the period.
1.
A clear mirror image shows strongly that short sellers did affect the market. When short interest ratio increases, price of P4 responds by decreasing. Alternatively, when short interest ratio decreases, price of P4 increases. During this peak period, short interest of
P4 increased over the whole period. After Apr06, the short interest increased substantially. Responding to this increase, portfolio 4 price decreased.
2.
It appears that a group of investors realized that there was potential overpricing and attacked some of the stocks in the market (P4 in our sample), well before the bubble burst in 2007. Remember this is the period when housing prices were climbing to their peak.
Also, for some portfolios, the short sellers jumped in too early, the increasing of the short interest did not get a response of prices dropping. The price continued to increase as positive correlation indicates. However, it does not mean the short sellers were not attacking them. They were just unsuccessful, because too many investors did not believe the market was over heated or the stock prices were overpriced and they kept buying and pushing out the price. Some of these investors are momentum traders; some are informed
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2014 Cambridge Conference Business & Economics ISBN : 9780974211428 traders (like hedge funds) trying to catch the bubble and profit from the momentum traders (or rational bubble in some literature in this case).
Review and tentative Conclusions
In this paper, based on the Housing index price of 10 cities, we found the price peaked in
August 2006. Therefore, we tested whether from Aug 05- Aug 06 stocks were attacked. This period is more convincing since during that period, housing price is still increasing, even though the bubble burst in Dec. 2007. We have found different sub categories for real estate industry, the majority of them being REITs. We then separated REITs into Mortgage REITs and non-
Mortgage REITs. Based on the period from August 2005-August 2006, returns were calculated for all stocks in the sample. We ranked the returns and categorized the sample into 5 groups (P0,
P1...P4). Based on the subgroups, we check whether their prices drop or increase. The results supports that P4 (low) has dramatic drops even when the housing price is still increasing in that period. P4 also has the highest short interest ratio. When SIR and price are graphed P4, P3 clearly show that when SIR is higher, price is lower. However, P0 (high) does not have that pattern. The P0 graph shows the SIR is not enough and when SIR increases, price also increases.
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Bibliography
Abreu, Dilip and Markus K. Brunnermeier, “Synchronization Risk and Delayed Arbitrage”, Journal of
Financial Economics 66 (2002) pp. 341-360
Brunnermeier, Markus K. and Stefan Nagel, The Journal of Finance, Vol LIX, No. 5, October 2004, pp2013-40
Cooper, George, The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market
Fallacy. Vintage Press, 2008, pp.121-125)
Schiller, Robert, Irrational Exuberance, Princeton University Press, Princeton, N.J. 2000
Sorkin, Andrew Ross, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves, Penguin Books, Updated edition (September 7, 2010)
Stiglitz, Joseph E., Globalization and its Discontents, W.W. Norton, 2002, pp 94-98
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Appendix A
Real Estate Industry Description
Classified by SIC Codes
Real Estate Sub-Industry Description
ISBN : 9780974211428
“General Contractors--Single-Family Houses, SIC:1521” covers general contractors primarily engaged in construction activities of single-family houses. General contractors primarily engage in building, remodeling, and repairing houses. Included in this industry are prefabricated housing units assembled on-site and townhouse construction. The industry is lack of concentration. A typical General Contractors firm may produce fewer than twenty-five houses each year, and employ fewer than twenty-five workers. Large General Contractor firms that do compete nationally are often relatively decentralized - consisting of generally autonomous regional operating companies. The few contractors that compete overseas usually do so through foreignowned subsidiaries. http://bi.galegroup.com/global/article/GALE%7CPC2501601556/
“Operative Builders, SIC:1531” covers builders primarily engaged in the construction of singlefamily houses and other buildings they sell on their own rather than as contractors. Unlike general contractors who perform construction work on a for-hire basis for the owner or owners of a development, operative builders are the owners of the structures they build and act as their own general contractors. In addition to construction, operative builders engage in land acquisition, sales, and a variety of other non-construction activities associated with developing and selling properties. Although operative builders were primarily involved in construction, principal industry activities also included subdividing and site development work, real estate management activities, land sales, construction-related activities, and miscellaneous operations. http://bi.galegroup.com/global/article/GALE%7CPC2501601558/
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“Mortgage Bankers and Loan Correspondents, SIC:6162” covers establishments primarily engaged in originating mortgage loans, selling mortgage loans to permanent investors, and servicing these loans. They may also provide real estate construction loans.
Mortgage bankers specialize in the origination or production of mortgage loans for sale to the secondary mortgage market. Many mortgage lenders make or buy loans, some sell loans, and others service loans. Mortgage bankers link theses three functions. http://bi.galegroup.com/global/article/GALE%7CPC2501601912/
“Title Insurance, SIC:6361” covers establishments primarily engaged in underwriting insurance to protect the owner of real estate, or lenders of money thereon, against loss sustained by reason of any defect of title. The concept of title insurance is primarily used in the United States. Title insurance protects borrowers and lenders against legal complications often having to do with fraud, liens, taxes, and other unexpected issues that can arise during and after real estate transactions. Typical title defects result from liens and encumbrances on a property related to unpaid taxes, land use and zoning restrictions, unsettled contractor disputes for work done on the property, and unrecorded deeds. Title insurance also protects the buyer and lender from fraud perpetrated by the seller. http://bi.galegroup.com/global/article/GALE%7CPC2501601922/
“Real Estate Agents and Managers, SIC:6531” covers establishments primarily engaged in renting, buying, selling, managing, and appraising real estate for others. The industry also includes agents and managers who work on commercial real estate, including high-rise office buildings, shopping centers, industrial plants, medical centers, and so forth. It is a service business involving a variety of professionals. http://bi.galegroup.com/global/article/GALE%7CPC2501601928/
“REITs, Real Estate Investment Trusts, SIC:6798” covers establishments primarily engaged in closed-end investments in real estate or related mortgage assets operating so that they could meet the requirements of the Real Estate Investment Trust Act of 1960 as amended. This act exempts
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REITs often are classified in one of two categories: equity or mortgage. Equity REITs mostly own and operate income-producing real estate. They increasingly have become real estate operating companies engaged in a wide range of real estate activities, including leasing, maintenance and development of real property and tenant services. One major distinction between Equity REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed. Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's Mortgage REITs generally extend mortgage credit only on existing properties. Many mortgage REITs also manage their interest rate and credit risks using securitized mortgage investments, dynamic hedging techniques and other accepted derivative strategies. http://www.reit.com/investing/reit-basics/reit-faqs/basics-reits
Segment in REITs
In the U.S. market, about 80% of public traded firms operate in the real estate industry are
REITs. Therefore, it is necessary to break the REITs industry into specific segments. In keeping with the approach used to determine a REIT company’s primary classification, a REIT’s subcategory is determined based on the primary focus of its portfolio as reported by the company itself. However, any REIT may or may not hold additional property types, or debt instruments, at any given time. The classification can only represent a REIT’s primary focus.
The table below divides REITs into three major categories and eight sub-categories. Each subcategory can be further subdivided into more specific types, which are not detailed here.
Category Description Sub-category Sub-category Description
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Equity
ISBN : 9780974211428
Primarily own and operate incomeproducing real estate.
Industrial/Office Invest in office, industrial, and/or flex properties.
Retail Invest in retail properties.
Residential Invest in residential home properties.
Lodging/Resorts Invest in hotel or lodging properties
HealthCare
Specialty
Invest in properties used in the healthcare industry.
Those cannot be easily classified into any of the above categories.
Mortgage Lend money directly to real estate owners and/or operators or indirectly through the purchase of
Hybrid mortgages or mortgage backed securities.
Home
Financing
Commercial
Financing
Lend money to owners or operators of residential properties or invests in mortgages and/or mortgage backed securities where the underlying properties are residential.
Lend money to owners or operators of commercial properties or invests in mortgages and/or mortgage backed securities where the underlying properties are commercial.
REITs that participate in both Equity and Mortgage investing. No sub-category http://www.djindexes.com/mdsidx/downloads/brochure_info/Dow_Jones_REIT_Industry_Classi fication_Hierarchy.pdf
There are three sub-categories, based on their business nature, directly connected to the housing bubble and following subprime mortgage crisis. One is Equity-Residential REITs, which can be further subdivided to
1) Apartment: The focus is on investment in multi-family dwellings.
2) Manufactured Home: The focus is on investment in manufactured home communities for individual households.
The other two sub-categories are Mortgage-Home Financing REITs and Mortgage-Commercial
Financing REITs.
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Therefore, we divided all REITs into five segments: Mortgage-Home Financing, Mortgage-
Commercial Financing, Residential-Apartment, Residential-Manufactured Home, and Others.
Others include all other REITs not belong to the previous four segments
To identify which segment a particular REIT belongs to, we rely on REIT Watch, a monthly statistical report on the REIT industry, issued by NAREIT (National Association of Real Estate
Investment Trusts). http://www.reit.com/investing/investing-tools/nareit-statistical-publications/reitwatch
This monthly report includes detail trade record of all the publicly traded REITs in the U.S. and their focus at that time. The table below shows the number of REITs in each segment over the focusing periods.
Mortgage_Home Financing
Mortgage_Commercial Financing
Residential_Apartment
Residential_Manufactured Home
Other REITs
All REITs
4/2004 – 7/2005 8/2005 – 7/2006 8/2006 – 2/2007
23
12
24
5
151
215
25
14
22
5
156
222
24
11
18
5
142
200
Appendix B
Timeline of news events
Mar 1999 Alan Greenspan argues that derivatives should remain unregulated, despite the demise of Long-Term Capital Management the previous year.
Jul 1999 Countrywide Financial and FannieMae ink a Strategic agreement which will lead
Countrywide to become the country's leading mortgage provider to poor minorities by the end of
2000.
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Sep 1999 Fannie Mae eases the credit requirements to encourage banks to extend home mortgages to individuals whose credit is not good enough to qualify for conventional loans.
Nov 1999 The U.S. Gramm-Leach-Bliley Financial Services Modernization Act repeals the
Glass-Steagall Act of 1933, the purpose of which was to prohibit the emergence of consolidated financial/insurance one-stop-shop corporations, in order to reduce the threat of contagion: banks were not allowed to own insurers or securities companies (and vice versa) and had to operate in a single state, inter alia. Lobbying by Citibank (subsequently to become Citigroup) and others has finally borne fruit.
Nov 2000 Fannie Mae announced that the Department of Housing and Urban Development
(“HUD”) would soon require it to dedicate 50% of its business to low- and moderate-income families" and its goal was to finance over $500 billion in Community Investment Act-related business by 2010
Dec 2000 The U.S. Commodities Futures Modernization Act, which allows banks to continue to self-regulate derivatives, is passed.
Jun 2002 President G.W. Bush sets goal of increasing minority home owners by at least 5.5 million by 2010 through tax credits, subsidies and a Fannie Mae commitment of $440 billion to establish NeighborWorks America with faith-based organizations
Jun 2003 Federal Reserve Chair Alan Greenspan lowers federal reserve’s key interest rate to 1%, the lowest in 45 years
Jul 2004 SEC launches the 'Consolidated Supervised Entities' program, a voluntary program that relaxes the minimum capital requirements for investment banks
Oct 2004 SEC effectively suspends net capital rule for five firms - Goldman Sachs, Merrill
Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley. Freed from government-imposed limits on the debt they can assume, they levered up 20, 30 and even 40 to 1
Mar 2005 According to the Federal Reserve, homes' appraised value made up 145% of nominal gross domestic product, while stocks and mutual funds were worth 82% of GDP
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Jul 2005 high price.
ISBN : 9780974211428
Companies like Lennar Corp, PulteGroup, Inc. , KB Home reach their historically
Oct 2005 Booming housing market halts abruptly in parts of the state.
Dec 2005 A total of 846,982 properties were in some stage of foreclosure in 2005.
Apr 2006 From the fourth quarter of 2005 to the first quarter of 2006, median prices nationwide dropped off 3.3 percent.
Aug 2006 Continued market slowdown. Prices are flat, home sales fall, resulting in inventory buildup. U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier.
Dec 2006 A total of 1,259,118 foreclosures were filed during the year, up 42 percent from
2005
Feb 2007 More than 25 subprime lenders declare bankruptcy, announce significant losses, or put themselves up for sale.
Apr 2007 New Century Financial, largest U.S. subprime lender, files for chapter 11 bankruptcy
Jul 2007 Two of Bear Stearns' hedge funds, betting on CDOs (backed by SP loans) have lost all $20 bn invested in mortgagerelated debt. The high-yield CDS premium soars in the U.S. and Europe.
Jul 2007 Ben Bernanke (Chairman of the Fed since February 1, 2006) acknowledges the increasing risk of the effects of riskbearing loan delinquencies spilling into other markets.
Jul 2007 Sowood Capital, a $3 bn hedge fund, lost half its value in July, and sells out, the biggest hedge fund to collapse. Harvard University reports that its endowment has lost $330 million.
Aug 2007 American Home Mortgage files for chapter 11 bankruptcy. Deutsche
Industriebank is bailed out for the first time, by a consortium of banks, after losses in U.S. SP mortgages.
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Aug 2007 Countrywide Financial Corporation, the biggest U.S. mortgage lender, narrowly avoids bankruptcy by taking out an emergency loan of $11 billion from a group of banks
Aug 2007 Countrywide, the largest U.S. mortgage provider, receives $2 bn from the Bank of
America in return for convertible preferred stock.
Aug 2007 The Fed cuts the U.S. discount rate from 6.25% to 5.75%. Citigroup, JPMorgan
Chase, Wachovia, Bank of America take up the Fed's offer of 30-day loan terms. The 3-day
AArated commercial-paper rate rises from 5.3% to 6.0% for asset-backed securities. From July
2006 to July 2007, U.S. home foreclosures were up by 93%. Lehman Brothers closes its SP lending arm.
Aug 2007 President Bush announces a limited bailout of U.S. homeowners unable to pay the rising costs of their debts. Ameriquest, once the largest subprime lender in the U.S., goes out of business.
Oct 2007 MBIA, a monoline (a company that insures corporate bonds 2007 and structured products), makes its first-ever quarterly loss. If a monoline is downgraded, so are the bonds it insures.
Oct 2007 Merrill Lynch replaces its CEO after writing down by $8.4 bn its CDO securities backed by SP mortgages and suffering its first quarterly loss since 2001.
Nov 2007 Citigroup replaces its CEO after a possible further $11 bn in SP write-downs.
Nov 2007 HSBC consolidates $45 bn of two structured-investment vehicles (SIVs).
Nov 2007 Kreditanstalt sets aside $3.4 bn to cover SP losses at IKB Deutsche Industriebank.
Wells Fargo takes a $1.4 bn charge on home mortgages. The Fed extends $8 bn in short-term loans until early 2008.
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