The Great Recession: United States versus Europe Zach Roth ABSTRACT This paper is a discussion of the forces at play during the Great Recession in the United States as well as the Sovereign Debt Crisis in Europe. The two crises, which together embody the Global Financial Crisis, are compared with a final conclusion pointing towards easy money policies as the force which brings the two crises together. Table of Contents The Great Recession: United States versus Europe………………………………………...3-­‐33 Appendix A (Summary of banking regulation prior to 2008)………………………….34-­‐36 Appendix B (Timeline of events pertinent to this paper)………………………………..37-­‐50 Appendix C (Bibliography)…………………………………………………………………………...51-­‐55 Appendix D (Graphs and Diagrams pertinent to this paper)…………………………...56-­‐61 It is suggested to browse Appendix A, B and D prior to reading the paper to ensure familiarity and basic knowledge of the crises at hand. Understanding the facts and information set forth in the appendices will give full appreciation of the paper.
2 The Great Recession: United States versus Europe The United States’ financial crisis of 2008 is credited as the first domino that fell in the global financial crisis. Ireland and Spain, two of the weakest European economies, blame the crisis in the United States for starting their respective crises. Simply put, the Irish and Spanish economies were on wobbly footing at best, and ultimately crashed down as a result of the tidal wave spurred by the financial crisis in the United States. This discussion will begin with the United State financial crisis of 2008, touching on events that led up to the crisis reaching as far back as 1789. A historical background on both Ireland and Spain will then be given, examining the triggers that resulted in their economies being known as two of the worst in Europe. Finally, legislative and governmental responses, by all three nations, will be examined and assessed, with a final conclusion discussing the common theme seen in all three of these crises. Unemployment reached record numbers during the great recession, and was one of the main reasons that the U.S. could not rebound from the crisis, due to lack of consumer spending. In December 2007, the unemployment rate in the U.S. was 5% and increased to 9.5% by June 2009. This resulted in the U.S. having one of the highest unemployment rates out of industrialized nations. Unemployment rates in Nevada, California and Michigan were the highest in the nation – above 10% -­‐ while the Dakotas and Nebraska boasted the lowest unemployment rates at 5.2% or lower. This extreme unemployment was the worst the U.S. had seen during any recession in recent decades. Consumer spending, as discussed earlier, was affected 3 by the high unemployment numbers resulting in a decrease from $52,203 in 2007 to $48,109 in 2010. 1 The stock market and other financial instruments associated with the market paint a grim picture of the 2008 crisis. From the Dow Jones Industrial Average’s (Dow) peak in October 2007 to its bottom in February 2009, there was a total of $11.2 trillion in losses on the stock market, reflected by the Dow going from 13,372 points to 7,062 points. Companies such as Citigroup and Goldman Sachs, which were intimately involved with the crisis, fell from around $295 and $227 to $30 and $106 respectively during that same time period. Additionally, the VIX, which is a ticker symbol for the Chicago Board Options Exchange Volatility Index and used as a measure of market risk – being referred to as the “investor fear gauge” – peaked at 80 points around October of 2008. For reference, the historical average of the VIX is between 18-­‐20 points, showing that investors were highly skeptical about the market and fearful regarding the crisis towards the end of 2008. 2 3 4 5 6 7 The Case-­‐Shiller National Home Price Index shows the extreme increase of home values during the real estate boom leading up to the financial crisis. The height of the index was 191, which was reached in Q1 of 2006 – for reference, the index’s baseline is 100, which was reached in Q1 of 2000. This shows that in a 6-­‐
1 Bureau of Labor Statistics. "The Recession of 2007-­‐2009." Spotlight on Statistics. U.S. Bureau of Labor Statistics, Feb. 2012. Web. 09 Nov. 2014. 2 Yahoo! Finance. "DJI Interactive Stock Chart." Yahoo! Inc. Stock. N.p., 2014. Web. 09 Nov. 2014. 3 Yahoo! Finance. "C Interactive Stock Chart." Yahoo! Inc. Stock. N.p., 2014. Web. 09 Nov. 2014. 4 Yahoo! Finance. "GS Interactive Stock Chart." Yahoo! Inc. Stock. N.p., 2014. Web. 09 Nov. 2014. 5 Paradis, Tim. "The Statistics Of The Great Recession." The Huffington Post. TheHuffingtonPost.com, 25 May 2011. Web. 09 Nov. 2014. 6 CBOE. "VIX Historical Price Data." Chicago Board Options Exchange. N.p., 2014. Web. 09 Nov. 2014. 7 Investopedia US. "VIX (CBOE Volatility Index)." Investopedia. N.p., 2014. Web. 09 Nov. 2014. 4 year time span, housing prices nearly doubled. On the flipside, the Case-­‐Shiller index hit a bottom of nearly 127 in Q4 of 2011, reflecting a 33% decrease in home prices during the Great Recession. (See figure D-­‐1) 8 Consumer confidence also suffered during the great recession, reaching a nearly record low of 55 in October 2009, while the U.S. average from 1952-­‐2014 was 85.06. The graph reads that above 90 the economy is on solid footing, while above 100 signals that the economy is growing. This point is further highlighted with a nearly 3% decline in retail sales in October and December 2008. This is a particularly bleak statistic because December is notorious for a strong retail sales month due to the holiday season. 9 10 The Federal Funds Rate, which is the interest rate at which a depository institution lends funds maintained at the reserve to another depository institution overnight, peaked in July 2006 at 5.25% and hit a low of .16% in January 2009. Meanwhile, the three-­‐month London Inter-­‐Bank Offered Rate (LIBOR) which is a benchmark rate that some of the world’s leading banks charge each other for short-­‐
term loans, peaked in August 2007 at 5.6%, and fell to just under .25% in January 2010. These peaks and valleys reflect the high interest rates and flow of capital 8 Federal Reserve Bank of St. Louis, and S&P Dow Jones Indices LLC. "S&P/Case-­‐Shiller U.S. National Home Price Index." Federal Reserve Bank of St. Louis. N.p., 2014. Web. 10 Nov. 2014. Paradis, Tim. "The Statistics Of The Great Recession." The Huffington Post. TheHuffingtonPost.com, 25 May 2011. Web. 09 Nov. 2014. 10 Trading Economics. "United States Consumer Sentiment." Trading Economics. N.p., 2014. Web. 09 Nov. 2014. 9 5 before the crisis, and extreme halt immediately following, due to the effects of the crisis being felt throughout the U.S. and ultimately on the global scale. 11 12 13 14 Multiple governmental agencies in the U.S. had a role in the financial crisis, such as the Federal Reserve, FDIC and the Treasury Department just to name a few. Some had a more prominent role than others, which ultimately resulted in some finger pointing among the agencies themselves. Following is a brief discussion of each major agency involved in the Great Recession, to allow for a basic understanding of the agencies that had an effect on the financial crisis. The Federal Reserve (Fed) is the central banking system of the United States, and was created by the Federal Reserve Act in December 1913 in response to multiple financial panics, specifically the panic of 1907. The main roles of the Fed include conducting the nation’s monetary policy, supervising and regulating banking institutions, maintaining the stability of the financial system and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The previously discussed Federal Funds Rate is one of the tools that the Fed has control over in order to control the monetary policy. The current bank rate is between .15% and 1.25%, with plans to increase it to avoid inflation and bring the U.S. economy back to normalcy. 15 16 11 Investopedia US. "Federal Funds Rate Definition." Investopedia. N.p., 2014. Web. 09 Nov. 2014. 12 Investopedia US. "London Interbank Offered Rate (LIBOR)." Investopedia. N.p., 2014. Web. 09 Nov. 2014. Federal Reserve Bank of New York. "Federal Funds Chart." New York Fed. N.p., 2014. Web. 09 Nov. 2014. 14 MacroTrends. "Historical LIBOR Rates Chart." MacroTrends. N.p., 2014. Web. 09 Nov. 2014. 15 The Federal Reserve Bank of Minneapolis. "Born of a Panic: Forming the Fed System." The Federal Reserve Bank of Minneapolis. N.p., 01 Aug. 1988. Web. 10 Nov. 2014. 16 Federal Reserve. "Mission." Federal Reserve. N.p., 2014. Web. 10 Nov. 2014. 13 6 The Federal Deposit Insurance Corporation (FDIC) is a government corporation that acts as an independent agency as a result of the Glass-­‐Stegall Act – also known as the Banking Act of 1933. The FDIC provides deposit insurance for depositors’ accounts in member banks as well as examines and supervises certain financial institutions for safety and soundness, performs certain consumer-­‐
protection functions, and manages banks in receiverships (failed banks). One of the main purposes of the FDIC was to prevent bank runs as seen during the Great Depression by insuring all depositors’ accounts up to $250,000, as it now stands. The Savings and Loan crisis of the 1980s as well as the financial crisis of 2008 tested the FDIC, with major banks going into receivership and temporary bank runs. Ultimately, the FDIC was able to successfully insure all deposits, maintaining the trust and faith of the American public. 17 The Department of the Treasury is an executive department and the treasury of the United States government. The Treasury was established by an act of Congress in 1789 to manage government revenue. There are a wide range of responsibilities that fall under the role of the Treasury Department which include producing all currency, collecting taxes, paying all bills of the United States, managing federal finances, managing government accounts and the U.S. public debt, supervising national banks and thrift institutions, supervising domestic and international financial, monetary, economic, trade and tax policy, enforcing federal finance and tax laws, investigating and prosecuting tax evaders and establishing 17 Federal Deposit Insurance Corporation. "FDIC Mission, Vision, and Values." Federal Deposit Insurance Corporation. N.p., 04 May 2009. Web. 10 Nov. 2014. 7 statistical reports. The Treasury’s biggest role in the Great Recession was the Troubled Assets Relief Program (TARP), a program that purchased assets and equity from financial institutions to strengthen the U.S. financial sector. The goal of TARP was to increase liquidity for banks to help spur lending and economic recovery. 18 19 The Office of the Comptroller of the Currency (OCC) was established by the National Currency Act of 1863 and is an independent bureau within the U.S. Department of the Treasury. The goal of the OCC is to charter, regulate and supervise all national banks and thrift institutions and the federal branches and agencies of foreign banks in the United States. The OCC has numerous objectives which include ensuring that national banks and federal savings associations operate in a safe and sound manner, provide fair and equal access to financial services to all Americans, treat customers fairly and comply with applicable laws and regulations. The OCC supervises national banks and federal savings associations and has the authority to take supervisory enforcement actions if those banks are not in compliance. 20 The U.S. Securities and Exchange Commission (SEC) is a government commission created by Congress through the Securities Exchange Act of 1934 to regulate the securities markets and protect investors. In addition to the Securities Exchange Act of 1934, the SEC enforces the Securities Act of 1933, the Trust 18 U.S. Department of Treasury. "Treasury History Overview." U.S. Department of Treasury. N.p., 27 Nov. 2010. Web. 10 Nov. 2014. The Washington Times. "Summary of the Emergency Economic Stabilization Act of 2008." Washington Times. The Washington Times, 28 Sept. 2008. Web. 10 Nov. 2014. 20 Office of the Comptroller of the Currency. "About the OCC." Office of the Comptroller of the Currency. N.p., 2014. Web. 10 Nov. 2014. 19 8 Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-­‐Oxley Act of 2002, the Dodd-­‐Frank Act of 2010 and the Jumpstart Our Business Startups Act of 2012. Aside from regulation and protection, the SEC also monitors corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. The SEC oversees securities exchanges, securities brokers and dealers, investment advisors, and mutual funds in an effort to promote fair dealing, the disclosure of important market information, and to prevent fraud. Generally, most issues of securities offered in interstate commerce, through the mail or on the Internet must be registered with the SEC. 21 22 23 The U.S. Commodity Futures Trading Commission (CFTC) is an independent U.S. federal agency formally established by the Commodity Futures Trading Commission Act of 1974, although its roots go back to the Commodity Exchange Act of 1936. The CFTC regulates the commodity futures and options markets through the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud. The CFTC has five committees, each headed by a commissioner, who is appointed by the President and 21 Investopedia US. "Securities And Exchange Commission (SEC) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. USA.gov. "Securities and Exchange Commission (SEC)." USA.gov. N.p., 14 Nov. 2014. Web. 20 Nov. 2014. 23 SEC. "Federal Securities Laws." US Securities and Exchange Commission. N.p., 2014. Web. 12 Nov. 2014. 22 9 approved by the Senate. These five committees focus on agriculture, global markets, energy and environmental markets, technology, and cooperation between the CFTC and SEC. The committees are populated by individuals who represent the interests of specific industries, traders, futures exchanges, commodities exchanges, consumers and the environment. After the Great Recession and following the Dodd-­‐
Frank Act, the CFTC has been working to bring comprehensive regulation and transparency to the 400 trillion dollar swaps marketplace. 24 25 The U.S. Department of Housing and Urban Development (HUD) is a government agency created in 1965 under President Johnson’s “Great Society” program. HUD’s goal is to support community development and increase home ownership by improving affordable home-­‐ownership opportunities, increasing safe and affordable rental options, reducing chronic homelessness, fighting housing discrimination and supporting vulnerable populations. To achieve these goals, HUD enforces the Fair Housing Act, oversees the Community Development Block Grant, the Housing Choice Voucher program as well as other housing programs targeted to assisting low-­‐income and disadvantaged Americans. The Office of Housing, within HUD, oversees The Federal Housing Administration (FHA), a U.S. government agency that was created by the National Housing Act of 1934. The FHA provides mortgage insurance to qualified FHA-­‐approved lenders to help protect lenders from losses associated with mortgage default – if a borrower defaults on a loan, the FHA 24 Investopedia US. "Commodity Futures Trading Commission (CFTC) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. CFTC. "Mission & Responsibilities." US Commodity and Futures Trading Commission. N.p., 2014. Web. 12 Nov. 2014. 25 10 will pay a specified claim amount to the lender. The goals of the FHA include maintaining and expanding homeownership, rental housing and healthcare opportunities, contributing to building and preserving healthy neighborhoods and communities and stabilizing credit markets in times of economic disruption. 26 27 28 The Millennial Housing Commission was created by the Millennial Housing Commission Act of 2001 with the goal of identifying, analyzing and developing recommendations that highlight the importance of housing, improve the housing delivery system and provide affordable housing for the American people, including recommending possible legislative and regulatory initiatives. To achieve this goal, the commission looked at how housing related to the validity of neighborhoods and neighborhood services, the economy and the interplay between state, local and federal housing policies and actions. Furthermore, the commission analyzed existing federal, state and local housing programs and private sector delivery systems to see how better housing opportunities could be provided, find ways to increase the role of the private sector in providing affordable housing, explore overlaps with other federal initiatives in the areas of tax policy, examine the housing finance system, explore the links between federal, state, and local housing mechanisms and review the importance and opportunities of evolving technologies. 29 26 Investopedia US. "U.S. Department of Housing and Urban Development (HUD) Definition." Investopedia. N.p., 2014. Web. 10 Nov. 2014. Investopedia US. "Federal Housing Administration (FHA) Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. 28 US Department of Housing and Urban Development. "About Housing." US Deptartment of Housing and Urban Development. N.p., 2014. Web. 11 Nov. 2014. 29 Millennial Housing Commission. "Mission Statement." Millennial Housing Commission. N.p., 2014. Web. 11 Nov. 2014. 27 11 Fannie Mae, Freddie Mac and Ginnie Mae are all secondary market lenders (SMLs), which means they provide funds to retail lenders. This coordination allows money to easily move from state to state and avoids certain mortgages from only being available in some states. SMLs have established regulations and guidelines to help the general public, such as not recycling a loan from a commercial lender unless the new homeowner meets certain financial qualifications. 30 The Federal National Mortgage Association (Fannie Mae), was founded in 1938 after the Great Depression as part of the New Deal, and is considered a government sponsored enterprise (GSE), even though it began being publicly traded in 1968. After the financial crisis of 2008, Fannie Mae was put under conservatorship of the Federal Housing Finance Association (FHFA) beginning on September 7, 2008. The purpose of Fannie Mae is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-­‐backed securities, allowing lenders to reinvest their assets into more lending and in effect increase the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations (aka “thrifts”). 31 32 33 The Federal Home Loan Mortgage Corporation (Freddie Mac) was established as a private corporation through the Emergency Home Finance Act of 1970. The purpose of creating Freddie Mac was to expand the secondary mortgage 30 FreeAdvice Staff. "Who Are Fannie Mae, Ginnie Mae, and Freddie Mac?" Real Estate Law. N.p., 2014. Web. 12 Nov. 2014. 31 Pickert, Kate. "A Brief History of Fannie Mae and Freddie Mac". Time. 14 July 2008. 32 Fannie Mae. "Company Overview." Fannie Mae. N.p., 06 Nov. 2014. Web. 10 Nov. 2014. 33 Fabozzi, Frank J.; Modigliani, Franco (1992), Mortgage and Mortgage-­backed Securities Markets, Harvard Business School Press, p. 2. 12 market for mortgages in the U.S., ultimately freeing up liquidity. Like Fannie Mae, Freddie Mac is a public-­‐private partnership, as it is considered a government sponsored enterprise as well as a publicly traded company. Freddie Mac, along with Fannie Mae, was also put under conservatorship of the FHFA on September 7, 2008. The purpose of Freddie Mac, along with other GSEs, is to purchase mortgage loans and mortgage-­‐related securities for investment on the secondary market, pool them, and sell them as guaranteed mortgage-­‐related securities. The secondary mortgage market consists of institutions engaged in buying and selling mortgages in the form of whole loans and mortgage-­‐related securities. This process increases the supply of money available for mortgage lending and increases the money available for new home purchases. 34 The Government National Mortgage Association (Ginne Mae) was spun off from Fannie Mae as part of the Housing and Urban Development Act of 1968, to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development (HUD), Ginnie Mae’s mission is to bring global capital into the United State housing finance market while minimizing the risk to the taxpayer – this is essentially providing cheaper mortgage options to Americans. Today, Ginnie Mae securities are the only mortgage-­‐backed securities that are backed by the "full faith and credit" guaranty of the United States government – although some have argued that Fannie Mae and Freddie Mac securities are de facto or "effective" beneficiaries of this guarantee after the US government rescued them from insolvency in 2008. The Ginnie Mae guarantee 34 Freddie Mac. "Company Profile." Freddie Mac. N.p., 2014. Web. 10 Nov. 2014. 13 allows mortgage lenders to obtain a better price for their loans in the capital markets. Lenders then can use the proceeds to make new mortgage loans available to consumers. This also helps to lower financing costs and create opportunities for sustainable, affordable housing for families seeking home ownership. 35 36 The Glass-­‐Steagall Act of 1933 and the Gramm-­‐Leach Bliley Act of 1999 go hand-­‐in-­‐hand when discussing the Great Recession. Glass-­‐Steagall, also referred to as the Banking Act, prohibited commercial banks from participating in the investment banking business. The Act was passed as an emergency measure to counter the failure of almost 5,000 banks during the Great Depression and prevent bank depositors from additional exposure to risk associated with stock market volatilities. In subsequent decades, Glass-­‐Steagall lost its potency, and was finally repealed by the Gramm-­‐Leach Bliley Act of 1999. The purpose of Gramm-­‐Leach Bliley was to update and modernize the financial industry as well as allow the financial industry to offer more services. The main function of the Act was to repeal the portion of Glass-­‐Steagall that said banks and other financial institutions were not allowed to offer financial services, like investments and insurance-­‐related services, as part of normal operations. Since many regulations were instituted since the 1930s to protect bank depositors, it was felt that repealing this portion of Glass-­‐
Steagall would not increase the exposure to risk for bank depositors, but rather, offer them more needed financial services. 37 38 35 Kopecki, Dawn. "Fannie, Freddie Have `Effective' Guarantee, FHFA Says (Update1)". October 23, 2008. bloomberg. Retrieved 15 May 2013. 36 Ginnie Mae. "Our History." Ginnie Mae. N.p., 07 Dec. 2012. Web. 11 Nov. 2014. 37 Investopedia US. "Glass-­‐Steagall Act Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. 38 Investopedia US. "Gramm-­‐Leach-­‐Bliley Act of 1999 (GLBA) Definition." Investopedia. N.p., 2014. 14 The Community Reinvestment Act (CRA) was enacted by Congress in 1977 with the purpose of encouraging depository institutions to help meet the credit needs of surrounding communities – especially low and moderate income neighborhoods. The Act requires federal regulators to assess the record of each bank or thrift in helping to fulfill its obligations to the community. This record will then be used in evaluating applications for future approval of bank mergers, charters, acquisitions, branch openings and deposit facilities. The percentage of “CRA loans” that a mortgage lender originates or purchases in the secondary market is important in terms of their record with helping the community, meaning CRA loans tend to trade at a premium on the secondary market. Traders often search generic packages of loans in an attempt to find overlooked individual CRA loans within the package that can be extracted and sold for a premium. 39 In order to completely understand and compare Europe’s recession to that of the United States, there will be a discussion of the systems in place in Europe, and internationally, before the crisis. This will provide a foundation and framework for examining Europe, with the goal of seeing how Europe’s organizations work on a broad scale, before looking at the financial departments that exist within Ireland and Spain. The European Central Bank (ECB) is the central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the national banks of each of the Web. 11 Nov. 2014. Investopedia US. "Community Reinvestment Act (CRA) Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. 39 15 EU members to formulate monetary policy that helps maintain price stability in the European Union. The responsibilities of the ECB include formulating monetary policy, conducting foreign exchange, holding currency reserves and authorizing the issuance of bank notes, among many other things. For comparison purposes, the ECB could be considered the European equivalent of the United States Federal Reserve mixed with the Treasury Department. 40 The International Monetary Fund (IMF) is an international organization that was created for the purpose of promoting global monetary and exchange stability, facilitating the expansion and balanced growth of international trade and assisting in the establishment of a multilateral system of payments for current transactions. To accomplish these goals, the Fund surveys and monitors economic and financial developments, lends funds to countries with balance-­‐of-­‐payment difficulties, and provides technical assistance and training for countries requesting it. For those reasons, the IMF played an integral role, along with the ECB, in working with the European Union during the sovereign debt crisis. 41 The European Economic and Monetary Union (EMU) is the successor to the European Monetary system, which was created to combine the European Union member states into a cohesive economic system. The EMU involves the coordination of economic and fiscal policies, coordination of economic and policy-­‐making between Member States, a common monetary policy run by the European Central Bank (ECB) and a common currency, the euro. There is no single institution 40 Investopedia US. "European Central Bank (ECB) Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. Investopedia US. "International Monetary Fund (IMF) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. 41 16 responsible for economic policy within the EMU; rather, the responsibility is divided between Member States and the EU institutions. While all 28 EU Member States take part in the economic union, some countries have taken integration further and adopted the euro – all initial EU members have completed the adoption of the euro, except for the United Kingdom and Denmark. (See figure D-­‐2) 42 43 The Stability and Growth Pact (SGP) is one of the most important agreements in terms of the EU and countries that want to adopt the euro as a currency. The agreement was signed between the 16 countries that originally formed the EU and began using the euro as a currency, by the Treaty on the Functioning of the European Union in 1997. Since the agreement was signed, all 28 Member States of the EU have adopted it. The purpose was to establish rules to ensure that all countries that were involved helped maintain the value of the euro by enforcing fiscal responsibility. Specifically, each country is required to maintain an annual budget deficit that is no greater than 3% of GDP, and each must have a national debt that is lower than 60% of GDP. The countries that are the face of the sovereign debt crisis – Portugal, Ireland, Greece, and Spain, also known as the PIGS nations – do not meet these criteria, and are the reason that all of Europe is working to bring them back on the path of austerity. Even though Spain and Ireland are different countries with different governments, their actions affect the value of the currency used by 42 Investopedia US. "European Economic and Monetary Union (EMU) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. European Commission. "Economic and Monetary Union." Economic and Financial Affairs. N.p., 26 Aug. 2014. Web. 12 Nov. 2014. 43 17 Germany and France. 44 45 Within Ireland and Spain, there are governmental departments that deal with the countries’ finances and work with the European Central Bank, dependent on policies that are set forth. Following will be a discussion of these departments, that were in place before the global financial crisis, to see how the respective countries operated leading up to the crisis. The Department of Finance in Ireland has a central role in implementing government policy and in advising and supporting the government on the economic and financial management of Ireland. Furthermore, the Department conducts policies to ensure that Ireland’s financial system will operate on a stable, sustainable and commercial basis through the production of the annual budget for Ireland as well as providing budgetary advice and reaching fiscal targets. The Department is made up of the Economics Division, Tax Policy Division, International and EU Division and Banking and Financial Services Division. Through these divisions, the Department of Finance advises the Irish government on economic policy, promotes economic and employment growth, develops efficient and effective tax policies, represents Ireland’s interests in the EU and international bodies and regulates the financial services sector. 46 The Central Bank of Ireland is responsible for both central banking and 44 Investopedia US. "Stability And Growth Pact (SGP) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. European Commission. "Stability and Growth Pact." Economic and Financial Affairs. N.p., 16 Sept. 2014. Web. 11 Nov. 2014. 46 Department of Finance. "Organisational Structure." Department of Finance. N.p., 2014. Web. 12 Nov. 2014. 45 18 financial regulation as a result of the Central Bank Reform Act of 2010 (prior to this act, central banking and financial regulation were two separate entities, with the Central Bank receiving its authority under the Central Bank Act of 1971). The Central Bank is responsible for maintaining price stability through monetary policy formulation at the Eurosystem level throughout Ireland and the eurozone area. Additionally, the Bank is responsible for regulation of Irish institutions and markets through risk-­‐based supervision and stress testing. 47 As the United States faced the Great Recession, the world was affected by the global financial crisis, mainly as a result of the domino that was set off by the U.S. Although Europe blames most of their sovereign debt crisis on the U.S., the economies of many European counties, specifically the PIGS, were in such disrepair that they were simply waiting for a catalyst event to cause the beginning of their crumble. The European Union had a multitude of responses to the sovereign debt crisis, which will now be touched upon, in an attempt to restore individual Member States as well as the EU as a whole. The Treaty on Stability, Coordination and Governance (TSCG), also known as the fiscal compact, builds on the budgetary rules outlined in the Stability and Growth Pact. The TSCG was signed on March 2, 2012, by the leaders of the then euro area members and 8 other EU member states in reaction to the European sovereign debt crisis. The Treaty agreed to implement a balanced budget rule in their national legislation through permanent, binding provisions, preferably of a constitutional character. Deficits were further limited to annual structural government deficit that 47 Central Bank of Ireland. "About Us." Central Bank of Ireland. N.p., 2014. Web. 12 Nov. 2014. 19 could not exceed .5% of GDP. Furthermore, the deficit must also be in line with the country-­‐specific minimum benchmark figure for long-­‐term sustainability, set by the preventive arm of the SGP. If countries are not in line with the benchmark figures, they must reduce budget deficits immediately – these austerity measures would be triggered automatically under this treaty as opposed to the SGP. Furthermore, countries that signed the treaty must inform each other, the Council of the EU, and the European Commission in advance when they plan to issue new debt. The purpose of the TSCG was to implement additional safeguards to not only protect the value of the euro, but also ensure that countries within the EU would not fall into a debt crisis with the expectations that they would be automatically “bailed out”. (See figure D-­‐3) 48 The European Stability Mechanism (ESM) was created after Member States of the eurozone signed the Treaty Establishing the European Stability Mechanism, regarded as the most important measure in curbing the sovereign debt crisis. This international organization is located in Luxemburg, and acts as a permanent source of financial assistance for member states in financial difficulty with a maximum lending capacity of 500 billion euros. The ESM issues debt instruments in order to finance loans and other forms of financial assistance to euro area Members States. In order to provide financial assistance, the ESM provides loans in the framework of a macroeconomic adjustment program, purchases debt in the primary and secondary debt markets, provides precautionary financial assistance in the form of credit lines 48 Eurozone Portal. "The Treaty on Stability, Coordination and Governance." Eurozone Portal. N.p., 30 June 2014. Web. 12 Nov. 2014. 20 and finances recapitalizations of financial institutions through loans to the governments of ESM Members. The ESM replaced two previous temporary eurozone funding programs, known as the European Financial Stability Facility and the European Financial Stabilization Mechanism. 49 50 51 The makeup of the European Union lends itself to an interesting situation when crises arise. Although the ECB and EMU set broad policies for the eurozone, each country is responsible for their individual monetary policies. This results in each country having to implement change during a time of crisis, as directed by the ECB and EMU. As seen in the global financial crisis, both Ireland and Spain needed funding from the ECB, which resulted in them accepting certain bailout conditions. Ireland and Spain both created organizations to combat their respective recessions and with the goal of becoming net providers for the eurozone. Following will be a discussion on the governmental organizations that both Ireland and Spain put in place, and their result on helping the respective countries climb out of their recessions. The National Asset Management Agency (NAMA) was established by the Irish legislature through the National Asset Management Agency Act of 2009 as a statutory body under the National Treasury Management Agency (NTMA). NAMA was created after the Irish banking crash of 2007, with the goal of removing uncertainty from the banking industry and repairing the balance sheets of a number 49 European Council. European Stability Mechanism Treaty. N.p.: n.p., n.d. European Council. 25 Mar. 2011. Web. 11 Nov. 2014. European Stability Mechanism. "Scope of Activity." European Stability Mechanism. N.p., 2014. Web. 12 Nov. 2014. 51 European Commission. "Treaty Establishing the European Stability Mechanism (ESM) Signed." Economic and Financial Affairs. N.p., 08 July 2012. Web. 12 Nov. 2014. 50 21 of financial institutions of systemic importance to the Irish economy – similar to banks that were “too big to fail” in the U.S. After NAMA was formally established, five institutions and their subsidiaries – Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Nationwide Building Society and EBS Building Society – joined and began participating by February 2010. NAMA essentially operated as a “bad bank” purchasing toxic assets from the aforementioned banks at approximately 42% of nominal loan balances. In exchange for these toxic loans, NAMA issued Government-­‐
guaranteed securities to the five participating financial institutions. 52 The Fund for Orderly Bank Restructuring (FROB) was created by the Spanish government in June of 2009 with the goal of facilitating the restructuring of Spain’s savings banks (Cajas) which were at the center of Spain’s banking crisis. The Cajas had a severe lack of regulation or were involved with regulatory bodies that simply looked the other way. This resulted in many of the Cajas failing, dropping from 45 in 2009 to seven in 2014. 53 54 The Company for the Management of Assets proceeding from Restructuring of the Banking System – it sounds better in Spanish, and is known as SAREB for short – was created by a Spanish Royal Decree law in November 2012. Important to note is the fact that 55% of SAREB is owned by Spanish banks, while the remaining percentage is owned by the FROB. SAREB enables the segregation of toxic or 52 National Asset Management Agency. "About NAMA." National Asset Management Agency. N.p., 2014. Web. 12 Nov. 2014. Chislett, William. "Spain's Banking Crisis: A Light in the Tunnel." Real Instituto Elcano. Fundación Real Instituto Elcano, 21 Feb. 2014. Web. 24 Sept. 2014. 54 Hugh, Edward. "Spain Gets 'FROB'bed-­‐Off by the EU Commission." Seeking Alpha. N.p., 21 Jan. 2010. Web. 12 Nov. 2014. 53 22 problematic assets of credit institutions that require public support so as to remove them from the balance sheet of Spanish financial institutions. The goal of SAREB is to restructure the Spanish financial system within a maximum period of 15 years as well as obtain the maximum possible profit earning capacity from the toxic assets. Loans and credits associated with the real-­‐estate sector and real estate assets have been transferred to SAREB from nationalized bodies and banks that have required medium-­‐term financial aid. SAREB is essentially a “bad bank”, where Spanish financial institutions put all of their toxic assets in an effort to increase liquidity by cleaning up their balance sheets. Spain’s plan, which resulted in them exiting the EU bail out in January 2014, was to make all banks transfer foreclosed assets and real estate loans to SAREB, in exchange for government backed SAREB bonds, which could be used as capital for European Central Bank financing, resulting in increased capital flows and liquidity. 55 56 57 Following the discussion on the governmental organizations that were involved pre-­‐ and post-­‐crisis, the actual topic of the crisis will finally be approached, beginning with Ireland. After many decades of bleak outlook, Ireland began creating its own success starting in the early 1990s through intense foreign direct investment (FDI) efforts by the Irish government. Ireland’s crisis came as a result of what started as true growth, by way of FDI – as opposed to an asset bubble situation. However, through wealth creation came the rise in assets and eventually 55 Chislett, William. "Spain's Banking Crisis: A Light in the Tunnel." Real Instituto Elcano. Fundación Real Instituto Elcano, 21 Feb. 2014. Web. 24 Sept. 2014. Neumann, Jeannette. "Spain's 'Bad Bank' Outlines Changes to Sale Process." The Wall Street Journal. N.p., 08 Apr. 2014. Web. 12 Nov. 2014. 57 SAREB. "Nature and Purpose." Bankia. N.p., 2014. Web. 12 Nov. 2014. 56 23 an asset bubble was formed, creating the perfect storm for the first financial crisis in the European sovereign debt era. Ireland was riding on a wave of economic growth – referred to as the Celtic Tiger – leading up to the banking crisis in 2007/2008. The Celtic Tiger period involved extreme growth through FDI, specifically from U.S. technology firms. Ireland slashed the corporate profits tax rate to 12.5% and the country’s location allowed companies to easily export to the rest of the EU – two factors which attracted firms to Ireland and increased the amount of inward FDI. However, after 2001, the economic growth that Ireland experienced came mostly from the real estate sector through a real estate property bubble. At the same time Irish citizens were riding the economic growth wave, earning a strong salary and borrowing excessively. In the words of former Minister of Finance Brian Lenihan, “we [the Irish] all partied”. Between 1996 and 2007 housing prices in Ireland quadrupled while investment in buildings only accounted for 5% of output in 1995 but rose to over 14% by 2008. In order to fund this “partying”, household debt increased from 57 billion euros in 2003 to 157 billion euros in 2008. Financial institutions increased their lending by 466% between 1998 and 2007, borrowing 15 billion euros from abroad in 2003, a figure that increased to 100 billion euros by 2007. 58 59 Once the housing bubble burst, it sent Ireland into a tailspin. Housing prices decreased 43% from their peak levels, leaving many homes sitting empty. National income decreased over 15% from peak levels with unemployment standing at 15%. 58 Debt Justice Action. "The Roots of Ireland's Debt Crisis." Anglo Not Our Debt. N.p., 30 Jan. 2012. Web. 12 Nov. 2014. Murray, Niall. "No, Minister We Didn't All 'party' in the Boom." Irish Examiner. N.p., 06 Dec. 2010. Web. 12 Nov. 2014. 59 24 Investment in Ireland – once an easy money concept during the Celtic Tiger – was down 48 billion euros in both 2006 and 2007 and a little over 18 billion euros in 2010. Currently, Irish debt stands at over 125% of gross national product, equivalent to about 183 billion euros. (See figure D-­‐4) 60 61 Ireland negotiated a financial assistance package with the EU and IMF on November 29, 2010, totaling 85 billion euros. This package came with three conditions, which caused Ireland to recapitalize their banking sector, – by creating NAMA and utilizing it as a bad bank as previously mentioned – conduct fiscal austerity measures and restore competitiveness and strengthen the economy’s growth potential. As a result of these measures, Ireland is seeing a strong future ahead – growth has resumed, driven mostly through Irish exports, employment growth has resumed, the housing market has stabilized, the bond market is welcoming Ireland back to the table and Irish semi-­‐states and banks are able to issue long-­‐term debt again. Most importantly, Ireland exited the EU/IMF bailout program in December 2013, after fulfilling the conditions of the bailout, as detailed above. Ireland was the first eurozone country to exit an EU/IMF bailout during the global financial crisis. Ireland still faces an uphill battle, with its budget deficit among the largest in the euro area and a high level of government debt. 60 Debt Justice Action. "The Roots of Ireland's Debt Crisis." Anglo Not Our Debt. N.p., 30 Jan. 2012. Web. 12 Nov. 2014. 61 Fintel Ltd. "Irish Debt Clock." Finance Dublin. N.p., 2014. Web. 25 Nov. 2014. 25 Furthermore, Unemployment numbers are still bleak, however, they are expected to rebound in the medium to long-­‐term. (See figure D-­‐5) 62 63 During the economic boom in Spain – resulting from low interests rates following the introduction of the euro in 1999 – the country was on a spending spree. Like in Ireland and the U.S., money was cheap, so properties were being built all over the country. While individuals were receiving mortgages and home loans, the government was collecting taxes and building public works projects. Spain’s financial crisis will now be explained, discussing what led up to their downfall while painting the picture for examining their role in the European sovereign debt crisis and the global financial crisis. 64 Spanish banks were very involved with the real estate boom, which led to a bigger bust once the bubble burst – from 1996 to 2007, real estate prices in Spain tripled. The defaults by property developers and construction firms as a percentage of total bank lending went from .6% in 2007 to over 25%, following the real estate bubble bursting. Non-­‐performing loans across all banking sectors went from .7% in 2007 to a record of 13.6% in 2013. 65 66 When the bubble eventually popped in 2007 as a result of the pressures from the global financial crisis, not only did the real estate bubble pop, but the 62 Debt Justice Action. "The Roots of Ireland's Debt Crisis." Anglo Not Our Debt. N.p., 30 Jan. 2012. Web. 12 Nov. 2014. 63 BBC News. "Ireland Profile." BBC News. N.p., 18 Nov. 2014. Web. 19 Nov. 2014. 64 Knight, Laurence. "Spanish Economy: What Is to Blame for Its Problems?" BBC News. N.p., 18 May 2012. Web. 12 Nov. 2014. 65 Chislett, William. "Spain's Banking Crisis: A Light in the Tunnel." Real Instituto Elcano. Fundación Real Instituto Elcano, 21 Feb. 2014. Web. 24 Sept. 2014. Knight, Laurence. "Spanish Economy: What Is to Blame for Its Problems?" BBC News. N.p., 18 May 2012. Web. 12 Nov. 2014. 66 26 construction industry that was propped up by real estate failed as well. This led many construction companies to go out of business and one in every four Spaniards to be unemployed. Further exacerbating this unemployment problem is the fact that Spain cannot devalue their currency – the problem with one central currency being used by many different governments with different economic policies. 67 On June 9, 2012, Spain realized that help from the eurozone was necessary to bailout its struggling banking sector. The eurozone finance ministers agreed to give Spain up to 100 billion euros to shore up their banking sector – Spain ended up using only 56 billion euros of the 100 billion. Many nationalized banks failed, resulting in mergers, money from the European Stability Mechanism and the Fund for Orderly Bank Restructuring. As a result of the FROB, the government owns 18% of all loans in the banking sector. All of the remaining regionally based savings banks, known as Cajas, are being brought under regulatory requirements through reform – some banks are even being supervised by the Bank of Spain. Furthermore, the Bank of Spain is conducting Forward Looking Exercises (FLEs) – which tests banks’ solvency on a continual basis – on all banks, to ensure that there will not be any “surprises.” 68 69 70 As of 2013, Spanish banks have recovered considerably, up more than four times over their 2012 figures. Nationalized Bankia, which was created after a 67 Knight, Laurence. "Spanish Economy: What Is to Blame for Its Problems?" BBC News. N.p., 18 May 2012. Web. 12 Nov. 2014. 68 Chislett, William. "Spain's Banking Crisis: A Light in the Tunnel." Real Instituto Elcano. Fundación Real Instituto Elcano, 21 Feb. 2014. Web. 24 Sept. 2014. 69 Knight, Laurence. "Spanish Economy: What Is to Blame for Its Problems?" BBC News. N.p., 18 May 2012. Web. 12 Nov. 2014. 70 The Telegraph. "Spain's Economic Crisis: A Timeline." The Telegraph. Telegraph Media Group, 08 June 2012. Web. 12 Nov. 2014 27 merger of 7 Cajas, is not included in that figure because there was a loss of 19 billion euros in 2012 versus a profit of 608 million euros in 2013, highly distorting the picture. Although banks are showing profits, they are still suffering because of the lack of need for loans, due to the high unemployment figures (approximately 26%). Most likely, Spanish banks will not return to pre-­‐2008 levels for many years to come. Spanish banks are currently profiting by loaning money from the European Central Bank at a very low interest rate (as part of the recovery package) and then buying high-­‐yielding bonds from their own government. In January 2014, Spain exited the EU bailout program, after receiving enough funds to allow banks to stay afloat and cut their losses from the real estate bubble. (See figure D-­‐6) 71 72 Important to note is that two Spanish banks, Santander and BBVA, are included in the Financial Stability Board’s list of the world’s 29 most systemically important banks, i.e. those that are “too big to fail.” This could cause a problem for Spain in the future if there is another credit crisis, whether it is global or restricted just to Spain. If the Bank of Spain lapses in conducting FLEs, or relaxes their stress tests, Spain could face yet another banking crisis if the banks that are “too big to fail” go back to their reckless lending policies. 73 Now that the Irish and Spanish components of the European sovereign debt crisis have been discussed, the connection with the Great Recession will now be made. Following years of real estate prices increasing in the U.S., the bubble finally 71 Frayer, Lauren. "Spain Exits Bailout In A Sign Of Progress, Not Full Recovery." NPR. NPR, 23 Jan. 2014. Web. 23 Nov. 2014. Chislett, William. "Spain's Banking Crisis: A Light in the Tunnel." Real Instituto Elcano. Fundación Real Instituto Elcano, 21 Feb. 2014. Web. 24 Sept. 2014. 73 Ibid. 72 28 burst in 2007, causing a textbook defined asset bubble to occur and the United States to plunge into a recession. The cause of this asset bubble – as well as the asset bubbles and subsequent recessions seen in both Ireland and Spain – was caused by easy money policies as a result of the Federal Reserve’s actions. Easy money, as the name implies, is money that is easily acquired. In terms of the monetary supply, easy money occurs when the Federal Reserve allows cash flow to build up within the banking system. This in turn lowers interest rates and makes it easier for banks and lenders to loan money to borrowers. Easy money normally results in the value of securities rising during periods of easy money, when the money is cheap. However, if this continues for a prolonged period, it can reverse due to fear of inflation, as seen with the global financial crisis. 74 From 2000-­‐2003, the U.S. Federal Reserve lowered the federal funds rate target from 6.5% to 1.0% to lessen the effects of the dot-­‐com bubble that occurred in the late 1990s/early 2000s as well as to spur economic growth following the September 11, 2001 terrorist attacks. The lowering of the federal funds rate resulted in easy money to become available and was taken advantage of by most of the American public. As discussed by business professors, Atif Mian and Amir Sufi, much of this easy money in the U.S. was taken advantage of by those who lived in neighborhoods with low credit scores. In fact, from 2000-­‐2006, the years leading up to the Great Recession, mortgage-­‐credit grew twice as fast in the aforementioned neighborhoods than in neighborhoods with high credit scores. The availability of easy money led to reckless lending by banks and financial institutions in an effort to 74 Investopedia US. "Easy Money Definition." Investopedia. N.p., 2014. Web. 13 Nov. 2014. 29 make a quick profit. Banks only profit when money is being borrowed, so after all of the qualified borrowers had borrowed money, those with less than stellar credit reports were targeted – making way for the all too famous subprime loans. If there was not easy money available on the capital markets, those who were not fit to borrow money would have been unable to, resulting in real estate prices rising at normal rates. Easy money policies ultimately caused the U.S. real estate bubble to burst, which was the first domino in the Great Recession, which then led to the global financial crisis. 75 76 77 A very similar picture of the availability of easy money is seen in both Ireland and Spain. Ireland experienced an economic boom in a very short period of time, giving Irish citizens an extreme increase in income that they had never experienced before. This increase in income allowed citizens to easily borrow money, while at the same time the ECB variable rate was cut from 4.25% in August 2001 to 2% in June 2003. Money was cheap, the Irish took advantage of it, and “partied” in the words of Minister of Finance Brian Lenihan. Irish citizens benefited from low-­‐
interest rate loans to purchase real estate as an investment vehicle, sending demand for real estate property through the roof. Eventually, a classic asset bubble occurred, resulting in prices that could not be sustained. 78 Spain’s economic boom, and arrival of easy money, occurred following the introduction of the euro in 1999, with rates as low as 2.5%. Spain had not 75 Boushey, Heather. "It Wasn't Household Debt That Caused the Great Recession." The Atlantic. Atlantic Media Company, 21 May 2014. Web. 13 Nov. 2014. 76 Holton, Glyn. "United States Financial Regulation." Risk Glossary. N.p., 2011. Web. 15 Nov. 2014. 77 Federal Reserve. "Open Market Operations." Federal Reserve. N.p., 2014. Web. 15 Nov. 2014. European Central Bank. "Key ECB Interest Rates." European Central Bank. N.p., 2014. Web. 13 Nov. 2014. 78 30 experienced a rate this low for some time, resulting in a spending spree as discussed earlier. Similar to Ireland and the U.S., this spending was not sustainable, and resulted in money being borrowed by less than ideal borrowers. Furthermore, the Spanish culture believes that everyone should own a home, making this period of easy money an ideal time for purchasing property. Homes began being built all over Spain, as the housing inventory could not keep up with demand. When the house of cards finally collapsed, the myriad of builders and contractors went bankrupt, making the Spanish banking crisis that much more difficult to overcome. 79 Ultimately, the U.S. financial crisis revealed the wizard behind the screen for both Ireland and Spain. In Ireland, this resulted in a lack of short term inter-­‐bank lending becoming available to Irish banks. The Irish banks had counted on this form of lending during their spending spree, resulting in a fairly abrupt stop to Irish lending once the U.S. financial crisis occurred. For Spain, their economy was on the brink of collapse due to the reckless borrowing by banking institutions. The interconnectedness of the global financial system resulted in lack of international funding for Spain’s spending spree once the U.S. and Irish financial systems collapsed. Even countries that had solid financial sectors in place – such as Germany – were affected by the U.S. and Irish crises, which caused a decrease in their international investments. All of these factors combined became too much for Spain to withstand, resulting in their property bubble bursting in late 2007. 80 81 82 83 79 Ibid. 80 BBC News. "Ireland Profile." BBC News. N.p., 18 Nov. 2014. Web. 19 Nov. 2014. 81 European Commission. "Ireland's Economic Crisis: How Did It Happen and What Is Being Done about It?" Representation in Ireland. N.p., 12 June 2012. Web. 12 Nov. 2014. Hadzelek, Aleksandra, and Rafael Prieto. "The Cautionary Tale of Spain's Real Estate Bubble." 82 31 Easy money policies are very difficult to regulate, due to their existence being based partially on the Federal Reserve or European Central Bank, which are both government agencies. Unless a cap or upper/lower range is placed on the federal funds rate or ECB variable rate, easy money will become available as the Fed or ECB sees fit – normally in response to counteracting a potential economic downturn. With that being said, banks can come under increased regulation in regards to lending funds, therefore decreasing the amount of potential borrowers that could access the available easy money. Although Dodd-­‐Frank does not address regulations to curb the negative components associated with easy money policies, following the Great Recession, the U.S. created the Consumer Financial Protection Bureau (CFPB). The CFPB helps make consumer financial products clearer and more understandable, makes it easier for homebuyers to choose a mortgage that is right for them and will supervise consumer financial products and services that once operated outside of federal oversight. Most importantly, the CFPB requires lenders to ensure that prospective buyers have the ability to repay their mortgage by providing the bank with verified financial information including sufficient assets or income to pay back the loan. On the other side of the pond, the ECB and IMF are requiring stricter lending requirements from banks – similar to those outlined by the CFPB – although there is not a European regulatory agency similar to the CFPB in existence. A major issue in Europe is the fact that there is one currency with one central bank composed of The Conversation. N.p., 12 Nov. 2012. Web. 13 Nov. 2014. Colombo, Jesse. "The European Property Bubble & the Sovereign Debt Crisis." The Bubble Bubble. N.p., n.d. Web. 13 Nov. 2014. 83 32 multiple different countries with different monetary policies. This makes the issue of easy money even more of an issue, because a handful of countries could take advantage of easy money policies, ruining the access to available easy money for worthy investors located in the stable eurozone countries. Unless Europe creates a government agency similar to the CFPB to ensure that easy money that becomes available is only given to credit worthy individuals, the eurozone will always face problems when easy money becomes available, as a result of countries that are interested in being net beneficiaries of the eurozone (e.g. the PIGS nations). 84 85 Easy money will always become available, as long as there are economic dips that the Fed, ECB or other international central banks attempt to avoid. The key to avoiding another Great Recession caused by easy money policies is to regulate the channels that provide easy money to borrowers. As long as only qualified borrowers have access to easy money, there is little problem with easy money being available. The easy money problems arise – and result in a global financial crisis – when those who should not have access to easy money are being given it in an effort to produce a profit for financial institutions. 84 U.S. Department of Treasury. The Financial Crisis Five Years Later. U.S. Department of Treasury. N.p., Sept. 2013. Web. 20 Nov. 2014. Blackstone, Brian, and Anton Troianovski. "Europe's Easy-­‐Money Policy Snubs German Savers." The Wall Street Journal. Dow Jones & Company, 24 Nov. 2013. Web. 15 Nov. 2014. 85 33 Appendix A Summary of Banking and Securities Regulation prior to 2008 The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was passed by Congress in 1980, which changed regulations in much of the banking sector. The Act terminated the Regulation Q ceiling on savings account interest rates and implemented minimum capital requirements for banks. Additionally, the Act defined a bank’s capital by separating it into two classes – primary and secondary capital. Primary capital would be a bank’s more permanent capital, specifically owners’ equity, retained earnings, surplus, various reserves and perpetual preferred stock and mandatory convertible securities. Secondary capital would be more transient, including limited-­‐life preferred stock and subordinated notes and debentures. The 1988 Basel Accord, referred to today as Basel I, had the purpose of defining roles of regulators in cross-­‐jurisdictional situations, ensuring that international banks or bank holding companies do not escape comprehensive supervision by a “home” regulatory authority and promote uniform capital requirements. This ensured that banks from different countries may compete with one another on a “level playing field.” The Basel Accord also replaced the asset-­‐
based primary capital requirements for U.S. commercial banks. Furthermore, the concept of primary and secondary capital, as discussed in DIDMCA, was incorporated into the new accord as tier 1 and tier 2 capital. In an effort to ease the separation between commercial and investment banking, the Fed granted certain commercial banks authority under Section 20 of the Glass-­‐Steagall Act to underwrite commercial paper, municipal revenue bonds, 34 mortgage-­‐backed securities and corporate bonds in the late 1980s. Additionally, the Fed allowed commercial banks to acquire investment bank subsidiaries through which they might underwrite and deal in all forms of securities, including equities. These moves by the Fed were all previews to repealing Glass-­‐Steagall, resulting in commercial banks receiving significant revenues from investment banking activities. The Financial Services Modernization Act, also known as the Gramm-­‐Leach-­‐
Bliley Act, was signed into law in 1999 with the purpose of revoking the Glass-­‐
Steagall separation of commercial and investment banking. Additionally, the Act revoked the 1956 Bank Holding Company Act, allowing for the creation of financial holding companies that may hold commercial banks, investment banks and insurance companies as affiliated subsidiaries. Although the Financial Services Modernization Act transformed the financial services industry it did little to change the regulatory framework associated with it. Prior to this act, commercial banks, investment banks and insurance companies operated separately with separate regulators. Now, these new financial holding companies (FHCs) combined all three of the aforementioned functions with no specific regulatory body. The approach taken was that the Fed and OCC would regulate commercial banking functions, the SEC would regulate investment-­‐banking functions and State insurance regulators would regulate the insurance functions. This allowed for cross function regulatory abuse due to the fact that no single regulator was in charge of every aspect of FHCs, one regulatory lapse that some credit as being a cause of the Great Recession. 35 The Commodity Futures Modernization Act (CFMA) was passed by Congress in 2000, amending the 1974 Commodity Exchange Act. CFMA exempted all OTC derivatives from being regulated by the CFTC, a point of contention leading up to CFMA. OTC derivatives remain largely unregulated, and the lack of regulation in this sector was another lapse that helped cause the Great Recession. The Sarbanes-­‐Oxley Act of 2002 was passed by Congress to increase corporate executives’ accountability, mandate a variety of internal controls at firms and strengthen the role of auditors. The act created the Public Company Accounting Oversight Board (PCAOB), a new federal agency, to oversee accounting firms. Sarbanes-­‐Oxley and the PCAOB came about following the dot-­‐com bubble of the late 1990’s/early 2000’s. The Act and the PCAOB addressed the accounting abuses that were present in the financial sector, but did little to combat the widespread abuses seen on Wall Street – another point of contention and catalyst to the Great Recession. Prior to the financial crisis of 2008, depression-­‐era banking and securities reforms had been dismantled and the laws that did remain on the books were not uniformly enforced. This haphazard regulatory environment lent itself to mismanagement and abuse, resulting in the worst financial crisis the U.S. experienced since 1929. Source used for Summary of Banking and Securities Regulation prior to 2008: Holton, Glyn. "United States Financial Regulation." Risk Glossary. N.p., 2011. Web. 15 Nov. 2014. 36 Appendix B Timeline January 2007 – U.S. housing crisis deepens. Banks and hedge funds that invested big in subprime mortgages are left with worthless assets as foreclosures rise. (United States) February 27, 2007 -­ Mortgage giant Freddie Mac says it will no longer buy the most risky subprime loans. (United States) June 1, 2007 – Anglo Shares peak at 17.53euro. (Ireland) Standard and Poor’s and Moody’s Investor Services downgrade over 100 bonds backed by second-­‐lien subprime mortgages. (United States) June 7, 2007 -­‐ Bear Stearns informs investors that it is suspending redemptions from its High-­‐Grade Structured Credit Strategies Enhanced Leverage Fund. (United States) June 28, 2007 -­‐ The Federal Open Market Committee (FOMC) votes to maintain its target for the federal funds rate at 5.25 percent. (United States) July 11, 2007 -­‐ Standard and Poor’s places 612 securities backed by subprime residential mortgages on a credit watch. (United States) July 31, 2007 -­ Investment bank Bear Stearns liquidates two hedge funds that invested in risky securities backed by subprime mortgage loans. (United States) August 10, 2007 -­‐ The Federal Reserve Board announces that it “will provide reserves as necessary…to promote trading in the federal funds market at rates close to the FOMC’s target rate of 5.25 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.” (United States) August 16, 2007 -­ Fitch Ratings cuts the credit rating of giant mortgage lender Countrywide Financial to its third-­‐lowest investment-­‐grade rating. (United States) August 17, 2007 -­‐ The Federal Reserve Board votes to reduce the primary credit rate 50 basis points to 5.75 percent, bringing the rate to only 50 basis points above the FOMC’s federal funds rate target. The Board also increases the maximum primary credit borrowing term to 30 days, renewable by the borrower. (United States) 37 September 11, 2007 – Sean Quinn admits to Anglo Irish Bank CEO David Drumm and chairman Sean FitzPatrick that he has built up a secret 24% stake in Anglo using Contracts for Difference (CFDs). (Ireland) September 18, 2007 -­‐ The FOMC votes to reduce its target for the federal funds rate 50 basis points to 4.75 percent. The Federal Reserve Board votes to reduce the primary credit rate 50 basis points to 5.25 percent. (United States) October 10, 2007 -­‐ U.S. Treasury Secretary Paulson announces the HOPE NOW initiative, an alliance of investors, servicers, mortgage market participants, and credit and homeowners’ counselors encouraged by the Treasury Department and the Department of Housing and Urban Development. (United States) October 15, 2007 -­‐ Citigroup, Bank of America, and JPMorgan Chase announce plans for an $80 billion Master Liquidity Enhancement Conduit to purchase highly rated assets from existing special purpose vehicles. (United States) October 31, 2007 -­‐ The FOMC votes to reduce its target for the federal funds rate 25 basis points to 4.50 percent. The Federal Reserve Board votes to reduce the primary credit rate 25 basis points to 5.00 percent. (United States) November 2007 – €150m in "working capital" is advanced by Anglo to Quinn to cover losses on the CFDs. Anglo will lend €1.97bn in six separate tranches to fund Quinn's margin calls between November 2007 and July 2008, as the bank's share price plummeted. (Ireland) November 1, 2007 -­‐ Financial market pressures intensify, reflected in diminished liquidity in interbank funding markets. (United States) December 11, 2007 -­‐ The FOMC votes to reduce its target for the federal funds rate 25 basis points to 4.25 percent. The Federal Reserve Board votes to reduce the primary credit rate 25 basis points to 4.75 percent. (United States) December 12, 2007 -­‐ The Federal Reserve Board announces the creation of a Term Auction Facility (TAF) in which fixed amounts of term funds will be auctioned to depository institutions against a wide variety of collateral. The FOMC authorizes temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). The Fed states that it will provide up to $20 billion and $4 billion to the ECB and SNB, respectively, for up to 6 months. (United States and Europe) December 21, 2007 -­‐ Citigroup, JPMorgan Chase, and Bank of America abandon plans for the Master Liquidity Enhancement Conduit, announcing that the fund “is not needed at this time.” (United States) 38 January 2008 -­‐ The U.S. economy is in recession. The crisis in subprime mortgages infects the credit markets. (United States) January 11, 2008 -­ Bank of America, the biggest U.S. bank by market value, agrees to buy Countrywide Financial for about $4 billion. (United States) January 22, 2008 -­‐ In an intermeeting conference call, the FOMC votes to reduce its target for the federal funds rate 75 basis points to 3.5 percent. The Federal Reserve Board votes to reduce the primary credit rate 75 basis points to 4 percent. (United States) January 30, 2008 -­‐ The FOMC votes to reduce its target for the federal funds rate 50 basis points to 3 percent. The Federal Reserve Board votes to reduce the primary credit rate 50 basis points to 3.5 percent. (United States) February 8, 2008 – PricewaterhouseCoopers – auditors to the Quinn Group – report it to the Financial Regulator, after it discovered funds had been transferred from Quinn Insurance Limited to another Quinn-­‐owned entity to fund Quinn's CFDs. (Ireland) March 11, 2008 -­‐ The FOMC increases its swap lines with the ECB by $10 billion and the Swiss National Bank by $2 billion and also extends these lines through September 30, 2008. (United States) March 14, 2008 -­‐ The Federal Reserve Board approves the financing arrangement announced by JPMorgan Chase and Bear Stearns. The Federal Reserve Board also announces they are “monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly function of the financial system.” (United States) March 16, 2008 -­ The Federal Reserve agrees to guarantee $30 billion of Bear Stearns' assets in connection with the government-­‐sponsored sale of the investment bank to JPMorgan Chase for $2 per share. (United States) The Federal Reserve Board votes to reduce the primary credit rate 25 basis points to 3.25 percent, lowering the spread between the primary credit rate and FOMC target for the federal funds rate to 25 basis points. The Board also votes to increase the maximum maturity of primary credit loans to 90 days. (United States) March 17, 2008 – St Patrick's Day Massacre – Anglo shares plummet 30% in price as U.S. bank Bear Stearns collapses. (Ireland) March 18, 2008 -­‐ The FOMC votes to reduce its target for the federal funds rate 75 basis points to 2.25 percent. The Federal Reserve Board votes to reduce the primary credit rate 75 basis points to 2.50 percent. (United States) 39 April 30, 2008 -­‐ The FOMC votes to reduce its target for the federal funds rate 25 basis points to 2 percent. The Federal Reserve Board votes to reduce the primary credit rate 25 basis points to 2.25 percent. (United States) May 2, 2008 -­ The FOMC increases existing swap lines with the ECB by $20 billion and with the Swiss National Bank by $6 billion. (United States and Europe) June 25, 2008 -­‐ The FOMC votes to maintain its target for the federal funds rate at 2.00 percent. (United States) June 27, 2008 – Board of Anglo meets in the Sheraton Hotel, Fota Island Cork – the last meeting before the Maple 10 transaction. Minutes record the executive of the bank had agreed a course of action with the Regulator. (Ireland) July 2008 – Spanish economy officially enters recession. (Spain) July 9, 2008 – David Drumm rings Con Horan – second in command in the Regulator – to tell him the executives of Anglo had decided to place the shares with "a group of Irish and international investors". (Ireland) Mr. Drumm also rings Mr. FitzPatrick who is on holiday in France. Mr. FitzPatrick tells gardai that Mr. Drumm told him about the plan on July 9, but did not tell him the identities of the 10 borrowers and he assumed it was full recourse. (Ireland) July 10, 2008 – Anglo starts contacting the Maple 10, travelling to France and Portugal to get holidaying borrowers to sign documents. (Ireland) July 11, 2008 -­ Federal regulators seize IndyMac Federal Bank after it becomes the largest regulated thrift to fail. (United States) July 14, 2008 – Maple 10 deal executed. Anglo loaned the Maple 10 €45m each so they could buy shares in the bank. Another €169m is lent to Mr. Quinn's wife and five adult children to buy the remaining stock. (Ireland) July 30, 2008 -­‐ President Bush signs into law the Housing and Economic Recovery Act of 2008 (Public Law 110-­‐289), which, among other provisions, authorizes the Treasury to purchase GSE obligations and reforms the regulatory supervision of the GSEs under a new Federal Housing Finance Agency. (United States) September 7, 2008 -­ Mortgage giants Fannie Mae and Freddie Mac are taken over by the government. (United States) 40 September 15, 2008 – Bank of America agrees to purchase Merrill Lynch for $50 billion. (United States) Lehman Brothers files for bankruptcy-­‐court protection. (United States) September 16, 2008 -­‐ American International Group, the world's largest insurer, accepts an $85 billion federal bailout that gives the government a 79.9% stake in the company. (United States) September 17, 2008 -­‐ The SEC announces a temporary emergency ban on short selling in the stocks of all companies in the financial sector. (United States) September 18, 2008 -­‐ The FOMC expands existing swap lines by $180 billion and authorizes new swap lines with the Bank of Japan, Bank of England, and Bank of Canada. (United States and Europe) September 21, 2008 -­‐ Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies subject to greater regulation by the Federal Reserve. (United States) September 25, 2008 -­‐ Federal regulators close Washington Mutual Bank and its branches and assets are sold to JPMorgan Chase in the biggest U.S. bank failure in history. (United States) September 29, 2008 – The Irish Government takes an overnight decision to guarantee the banking system, covering customer deposits and banks' own borrowings to a total of €440bn in response to the Lehman Brothers collapse. (Ireland) Congress rejects a $700 billion Wall Street financial rescue package, known as the Troubled Asset Relief Program or TARP, sending the Dow Jones industrial average down 778 points, its single-­‐worst point drop ever. (United States) The FOMC authorizes a $330 billion expansion of swap lines with Bank of Canada, Bank of England, Bank of Japan, Danmarks Nationalbank, ECB, Norges Bank, Reserve Bank of Australia, Sveriges Riksbank, and Swiss National Bank Swap lines outstanding now total $620 billion. (United States and Europe) October 3, 2008 -­ Congress passes a revised version of TARP and President Bush signs it. (United States) Wells Fargo & Co., the biggest U.S. bank on the West Coast, agrees to buy Wachovia for about $14.8 billion. (United States) 41 October 8, 2008 – New York Fed bails out AIG, again, for $37.8 billion. (United States) The FOMC votes to reduce its target for the federal funds rate 50 basis points to 1.50 percent. The Federal Reserve Board votes to reduce the primary credit rate 50 basis points to 1.75 percent. (United States) October 13, 2008 -­‐ The FOMC increases existing swap lines with foreign central banks. The Bank of England, European Central Bank, and Swiss National Bank announce that they will conduct tenders of U.S. dollar funding at 7-­‐, 28-­‐, and 84-­‐day maturities at fixed interest rates. (United States and Europe) October 24, 2008 – Financial Regulator announces record €3.5m sanction against Quinn Insurance Limited. Sean Quinn is personally fined €200,000 and steps down as chairman. (Ireland) October 29, 2008 -­‐ The FOMC votes to reduce its target for the federal funds rate 50 basis points to 1.00 percent. The Federal Reserve Board reduces the primary credit rate 50 basis points to 1.25 percent. (United States) The International Monetary Fund (IMF) announces the creation of a short-­‐term liquidity facility for market-­‐access countries. (Europe) November 18, 2008 -­ Ford, General Motors and Chrysler executives testify before Congress, requesting federal loans from TARP. (United States) November 23, 2008 -­ The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. agree to rescue Citigroup with a package of guarantees, funding access and capital. Citigroup will issue preferred shares to the Treasury and FDIC in exchange for protection against losses on a $306 billion pool of commercial and residential securities it holds. (United States) December 11, 2008 – The Federal Government declares the economy is in a recession. (United States) December 16, 2008 -­‐ The FOMC votes to establish a target range for the effective federal funds rate of 0 to 0.25 percent. The Federal Reserve Board votes to reduce the primary credit rate 75 basis points to 0.50 percent. The Federal Reserve Board also establishes the interest rates on required reserve balances and excess balances at 0.25 percent for reserve maintenance periods beginning December 18, 2008. (United States) December 18, 2008 – Sean FitzPatrick resigns as Chairman of Anglo. (Ireland) 42 December 19, 2008 -­ The U.S. Treasury authorizes loans of up to $13.4 billion for General Motors and $4.0 billion for Chrysler from TARP. (United States) December 21, 2008 The government says it will inject €5.5bn into the country's three main lenders and will also underwrite Bank of Ireland and Allied Irish Banks plans to raise €1bn each. (Ireland) January 2009 – Pat Whelan prepares a report for Anglo's board on the Quinn-­‐
Maple 10 deal. The report repeatedly states that the Financial Regulator was kept "fully informed". (Ireland) Standard & Poor's is the first credit rating agency to downgrade Spain, cutting its treasured AAA rating by one notch to AA+. (Spain) Spanish economy enters recession for first time since 1993. (Spain) January 7, 2009 – William McAteer resigns from Anglo. (Ireland) January 9, 2009 – Mr. Neary announces he will retire as regulator. (Ireland) January 12, 2009 -­‐ The FDIC issues a letter to FDIC-­‐supervised institutions calling on them to implement a process to monitor their use of capital injections, liquidity support and/or financing guarantees obtained through Treasury, FDIC, and Federal Reserve financial stability programs. (United States) January 15, 2009 Ireland abandons plans to inject €1.5bn into third largest bank Anglo Irish Bank and nationalizes the commercial lender amid fears it could collapse. (Ireland) January 21, 2009 – Anglo nationalized after Government passes emergency legislation. (Ireland) February 2009 -­‐ Spain adopts an economic stimulus plan worth an estimated 5% of GDP, including €8bn (£6.5bn) euros of infrastructure projects. (Spain) The Bank of Spain bails out regional lender Caja Castilla-­‐La Mancha, the country's first bank rescue in recent years. (Spain) February 11, 2009 -­ Ireland says it will inject €7bn into Bank of Ireland and Allied Irish in return for guarantees on lending, executive pay and mortgage arrears. It gets a 25% indirect stake in both banks. (Ireland) February 17, 2009 – President Obama signs American Recovery and Reinvestment Act of 2009. (United States) 43 February 18, 2009 – President Obama announces the Homeowner Affordability and Stability Plan. (United States) February 24, 2009 – Anglo HQ in central Dublin is raided by the fraud squad. (Ireland) March 2009 -­‐ Unemployment soars to 17.4%, with over 4 million people jobless. (United States) March 2009 -­‐ Ireland loses its AAA debt rating as public finances deteriorate amid a deep recession. (Ireland) March 31, 2009 – Anglo reports €12.7bn loss – the biggest corporate losses in Irish history. (Ireland) April 2009 -­‐ The government unveils its second budget in six months to deal with a rapidly contracting economy. (Ireland) April 7, 2009 -­ Lenihan announces the creation of a "bad bank" to deal with the risky property loans of financial institutions. The National Asset Management Agency (NAMA) is established six months later, ready to take assets worth a nominal €77bn at an average discount of 30%. (Ireland) May 29, 2009 -­ Ireland is forced to inject up to €4bn into Anglo after its loan book sours and drags the bank to a half-­‐year loss of €4.1bn, at the time the worst loss in Irish bank history. It manages to more than triple that record within two years. (Ireland) June 2009 -­‐ Spain creates a bank bail-­‐out fund, known as the FROB, with firepower of up to €99bn euros and urges weaker savings banks to merge to improve solvency. (Spain) June 9, 2009 – Big banks repay bailout funds. American Express, Goldman Sachs, JPMorgan Chase and Morgan Stanley were among the bank holdings companies that agreed to return a combined $68.3 billion to the government. That represents more than a quarter of the federal bailout money that the nation’s banks have received since October 2008. (United States) September 30, 2009 – Central Bank says Anglo bailout could ultimately cost €34bn. (Ireland) October 2009 -­‐ Ireland votes in favor of the European Union's Lisbon Treaty in a new referendum, having rejected it in a vote a year earlier. (Ireland) 44 December 2009 – Whelan, who remained working with Anglo after nationalization, resigns. (Ireland) December 11, 2009 -­‐ Citigroup and Wells Fargo put plans in place for repayment. (United States) Wells Fargo joined a growing list of banks that are exploring options to return government bailout money. (United States) January 2010 -­‐ Spain's economy exits recession. (Spain) February 2010 -­‐ Thousands of workers demonstrate against government spending cuts and plans to raise the retirement age by two years to 67 -­‐ the first mass labor protests since the Socialists came to power in 2004. (Spain) February 19, 2010 The government takes its first direct stake in Bank of Ireland, taking over 16% of the lender in lieu of a payment due on the 25% indirect stake it held. (Ireland) March 18, 2010 – Mr. FitzPatrick first arrested and questioned, is released without charge. (Ireland) March 30, 2010 -­ NAMA buys a first batch of loans at an average discount of 47% – requiring lenders to raise more capital to absorb losses than previously envisaged. The central bank also demands that lenders hold a minimum 8% of core tier 1 capital by the end of the year. It sees Ireland take control of Irish Nationwide building society with a promised capital injection of €2.7bn. Dublin pumps another €8.3bn into Anglo, and says it may need another €10bn. (Ireland) April 2010 -­‐ As talks intensify on granting Greece an economic bailout, attention turns to Spain amid worries over its public deficit -­‐ 11.2% of GDP in 2009. (Spain) April 16, 2010 -­‐ SEC Sues Goldman Sachs. Goldman Sachs was accused of securities fraud for allegedly failing to disclose conflicts of interest in subprime mortgage securities it sold to investors, who ultimately lost more than $1 billion. (United States) May 2010 After initially denying Spain was in trouble, Zapatero announces austerity measures worth around 1.5% of GDP. Austerity measures passed over the following six months, including a two percentage point rise in VAT, are worth an estimated total of 5% of GDP. (Spain) Unemployment rate climbs to over 20% for first time in nearly 13 years. Parliament approves 15bn-­‐euro (£13bn) austerity package. (Spain) 45 May 13, 2010 The government takes an 18% stake in AIB after it, like Bank of Ireland, is prohibited by an EU ruling from settling a coupon payment on the government's €3.5bn preference shareholding in cash. (Ireland) June 2010 Spain's cabinet approves a labor market reform. The bill is passed through parliament in September. (Spain) June 9, 2010 The state's Bank of Ireland stake rises to 36% after a €3bn capital raising, reaching the central bank's capital ratio target with six months to spare. (Ireland) July 21, 2010 -­‐ Obama signs overhaul of financial system. The law subjects more financial companies to federal oversight and regulates many derivatives contracts while creating a consumer protection regulator and a panel to detect risks to the financial system. (United States) September 2010 -­‐ The cost of bailing out Ireland's stricken banking system rises to 45bn euro (£39bn), pushing the country's budget deficit up to around a third of GDP. (Ireland) September 30, 2010 Dublin puts another €2.7bn into Irish Nationwide, doubling its state aid, and tells AIB, EBS and Bank of Ireland they need to raise even more capital. It says it will take a majority stake in AIB. (Ireland) November 2010 -­‐ The government agrees an 85bn euro rescue package with the EU and the IMF, in a bid to tackle a huge hole in Ireland's public finance. As part of the package, the government drafts an austerity program entailing four years of tax rises and spending cuts. (Ireland) November 29, 2010 Prime Minister Brian Cowen signals junior bondholders at Ireland's top two banks should expect to share some of the pain, as public anger builds with calls to "burn the bondholders". Ireland ruled out forcing holders of bank senior debt to take a hit, however. (Ireland) December 2010 -­‐ The central government forces the country's 17 autonomous regions, considered the weak link in spending cuts, to publish more details of their accounts. (Spain) December 15, 2010 The government tops up an earlier €350m capital injection into EBS by pouring an extra €525m into the building society. (Ireland) 46 December 23, 2010 Ireland effectively nationalizes AIB with a €3.7bn capital injection, giving it a 93% holding once the bank completes the sale of its Polish interests to Spanish group Santander. As part of Ireland's €85bn IMF-­‐EU bailout, the bank still needs a further €6.1bn of core tier 1 capital. (Ireland and Spain) January 2011 -­‐ Parliament approves finance bill required as condition of EU/IMF bailout. (Ireland) January 2011 Spain passes pension reform that will gradually raise the retirement age to 67 from a previous 65. (Spain) February 9, 2011 The outgoing government shelves plans to inject up to €10bn into banks until after an election, throwing down a challenge to opposition parties who want bondholders to shoulder more of the cost. The new government then delays the cash injection until the release of stress tests results on March 31. (Ireland) March 2011 -­‐ New government, headed by Fine Gael leader Enda Kenny, takes office. Mr. Kenny pledges to renegotiate terms of EU/IMF bailout. (Ireland) March 31, 2011 Ireland's central bank publishes the results of "stress tests" on its four remaining banks, estimating that an additional €24bn injection of capital will be needed to boost their reserves and cover the cost of more loan write-­‐offs. (Ireland) June 2011 Zapatero decides to bring forward national elections to November, four months early. (Spain) July 2011 -­‐ Ratings agency Moody's downgrades Ireland's debt rating to junk status. (Ireland) August 5, 2011 -­‐ Standard & Poor's downgraded the U.S.'s triple-­‐A credit rating to AA-­‐plus and issued a negative outlook, meaning another downgrade is possible in the following 12 to 18 months. (United States) September 2011 -­‐ Parliament passes a constitutional amendment forcing governments to keep balance budgets. (Spain) November 2011 -­‐ Mariano Rajoy's centre-­‐right People's Party wins an absolute majority in November 20 elections as voters punish the outgoing Socialist government for the economic crisis. (Spain) 47 December 2011 -­‐ New government says on December 30 that the public deficit for 2011 would come in at 8% of GDP, well above a target of 6%. The government also announces new austerity measures with a cut in public spending by €8.9bn in 2012 for all ministries. (Spain) Treasury Minister Cristobal Montoro announces tax hikes to focus on the wealthy, raising around €6bn. (Spain) Taoiseach Enda Kenny unveils budget touted as beginning the process of moving towards a deficit of no more than 3% of GDP by 2015. (Ireland) January 2012 -­‐ Spain ends 2011 with almost one-­‐in-­‐four of its economically active population out of work. The jobless rate jumps to 22.85%, or 5.27m people -­‐ the highest in the European Union. (Spain) Spanish economy falls back into recession. (Spain) March 2012 -­‐ Spain will aim to save more than €27bn in its 2012 budget through corporate taxes, freezing civil servant wages and ministerial spending cuts. Rajoy has said he will reduce the budget deficit to equal to 5.3% of GDP in 2012 from 8.5% of GDP in 2011. (Spain) April 2012 -­‐ Thousands of people protest across Spain against government cuts aimed at tackling the debt crisis. (Spain) May 2012 -­‐ Government says 2011 public deficit 8.9% of GDP. (Spain) May 2012 -­‐ Bankia asks for a €19bn state rescue on May 25. Spain is nationalizing Bankia, which holds some 10% of the country's bank deposits, weighed down by heavy losses from the property crash. (Spain) June 2012 -­‐ Montoro says Spain's high borrowing costs mean it is effectively shut out of the bond market and the EU should help Madrid recapitalize its debt-­‐laden banks. Spain still needs to refinance about €82bn of debt in 2012, while helping its regions to repay maturing debts of about €16bn in the second half of 2012. (Spain) June 2012 -­‐ Irish voters approve European Union fiscal treaty by 60% at a referendum, thereby endorsing the government's commitment to an EU-­‐backed austerity program. (Ireland) June 9, 2012 -­ Spain bows to bailout of struggling bank sector. Eurozone finance ministers agree to lend country up to €100bn to shore up its banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week. (Spain) 48 July 23/24, 2012 – Mr. FitzPatrick, McAteer and Whelan are charged with counts contrary to Section 60 of the Companies Act. (Ireland) September 2012 -­‐ Government creates "bad bank" to off-­‐load toxic property assets of indebted banking sector. Eurozone countries demand this as one of a number of conditions for any bail-­‐out loan for Spain. (Spain) November 2012 -­‐ The European Commission approves the government's plans to restructure the troubled banks Bankia, Banco de Valencia, NCG and Catalunya Banc, which were nationalized after experiencing heavy losses on loans to homebuyers and property developers. (Spain) January 2013 -­‐ Catalonia asks the central government for a further 9bn euros (£7.6bn) bailout, on top of the 5bn euros it requested in August 2012. (Spain) January 2, 2013 -­ The U.S. House of Representatives approved a Senate bill to avert $600 billion in automatic tax increases and spending cuts known as the "fiscal cliff." (United States) February 2013 -­‐ The jobless rate rises to 26.3% of the workforce. Youth unemployment increases to 55.7%. (Spain) February 2013 -­‐ The European Central Bank approves a deal to liquidate the former Anglo Irish Bank, which was nationalized in January 2009. The deal allows Ireland to defer by decades the bill for its most controversial bank bailout. (Ireland) March 2013 -­‐ European Court of Justice rules that Spanish law does not do enough to protect homeowners who default on their mortgages from being evicted. The ruling comes in response to the eviction of an estimated 350,000 families from their homes in the wake of the 2008 property crash. (Spain) March 1, 2013 -­‐ AIG, the insurance giant whose derivative bets went sour at the height of the 2008 worldwide financial pandemic, announced that it had repaid its final debt to the U.S. Treasury of its $22.7 billion government bailout. (United States) April 2013 -­‐ Spain's unemployment rate soars to new record of 27.2% of the workforce in the first quarter, passing six million figure, although the rate of increase slows. (Spain) June 2013 -­‐ IMF says Spain makes strong economic progress but needs to boost job creation. (Spain) New government figures show Ireland is back in recession for the first time since 2009. (Ireland) 49 September 2013 -­‐ Economy registers 0.1% growth in July-­‐September, formally lifting it out of recession. (United States) December 2013 -­‐ Ireland officially exits EU/IMF bailout program having fulfilled its conditions -­‐ the first bailed-­‐out eurozone country to do so. (Ireland) April 16, 2014 – Mr FitzPatrick is cleared while deliberations continue on the two other men. (Ireland) April 17, 2014 – McAteer and Whelan found guilty of 10 counts of illegal lending to the Maple 10, and not guilty of giving illegal loans to six members of the Quinn family. (Ireland) October 2014 -­‐ The first post-­‐bailout budget introduces tax cuts, and -­‐ following criticism from the US and EU -­‐ ends a loophole that allowed foreign multinationals to pay very low tax in other countries. (Ireland) Sources used for Timeline: BBC News. "Ireland Profile." BBC News. N.p., 18 Nov. 2014. Web. 20 Nov. 2014. BBC News. "Spain Profile." BBC News. N.p., 12 Nov. 2014. Web. 13 Nov. 2014. CNBC. "Back from the Brink: Financial Crisis Timeline." CNBC. N.p., 2013. Web. 12 Nov. 2014. Federa Reserve Bank of St. Louis. "The Financial Crisis Timeline." The Financial Crisis Timeline. N.p., n.d. Web. 12 Nov. 2014. Irish Independent. "Timeline: From Crisis to Chaos to Collapse." News Courts. N.p., 18 Apr. 2014. Web. 12 Nov. 2014. The Telegraph. "Ireland's Banking Crisis: Timeline." The Telegraph. Telegraph Media Group, 31 Mar. 2011. Web. 12 Nov. 2014. The Telegraph. "Spain's Economic Crisis: A Timeline." The Telegraph. Telegraph Media Group, 08 June 2012. 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"European Central Bank (ECB) Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. Investopedia US. "European Economic and Monetary Union (EMU) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. Investopedia US. "Federal Funds Rate Definition." Investopedia. N.p., 2014. Web. 09 Nov. 2014. Investopedia US. "Federal Housing Administration (FHA) Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. Investopedia US. "Glass-­‐Steagall Act Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. Investopedia US. "Gramm-­‐Leach-­‐Bliley Act of 1999 (GLBA) Definition." Investopedia. N.p., 2014. Web. 11 Nov. 2014. Investopedia US. "International Monetary Fund (IMF) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. 53 Investopedia US. "London Interbank Offered Rate (LIBOR)." Investopedia. N.p., 2014. Web. 09 Nov. 2014. Investopedia US. "Securities And Exchange Commission (SEC) Definition." Investopedia. N.p., 2014. Web. 12 Nov. 2014. Investopedia US. 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Web. 12 Nov. 2014. Neumann, Jeannette. "Spain's 'Bad Bank' Outlines Changes to Sale Process." The Wall Street Journal. N.p., 08 Apr. 2014. Web. 12 Nov. 2014. Office of the Comptroller of the Currency. "About the OCC." Office of the Comptroller of the Currency. N.p., 2014. Web. 10 Nov. 2014. Paradis, Tim. "The Statistics Of The Great Recession." The Huffington Post. TheHuffingtonPost.com, 25 May 2011. Web. 09 Nov. 2014. Pickert, Kate. "A Brief History of Fannie Mae and Freddie Mac". Time. 14 July 2008. SAREB. "Nature and Purpose." Bankia. N.p., 2014. Web. 12 Nov. 2014. SEC. "Federal Securities Laws." US Securities and Exchange Commission. N.p., 2014. Web. 12 Nov. 2014. 54 The Telegraph. "Spain's Economic Crisis: A Timeline." The Telegraph. Telegraph Media Group, 08 June 2012. Web. 12 Nov. 2014 Trading Economics. "United States Consumer Sentiment." Trading Economics. N.p., 2014. Web. 09 Nov. 2014. USA.gov. "Securities and Exchange Commission (SEC)." USA.gov. N.p., 14 Nov. 2014. Web. 20 Nov. 2014. U.S. Department of Housing and Urban Development. "About Housing." US Deptartment of Housing and Urban Development. N.p., 2014. Web. 11 Nov. 2014. U.S. Department of Treasury. The Financial Crisis Five Years Later. U.S. Department of Treasury. N.p., Sept. 2013. Web. 20 Nov. 2014. U.S. Department of Treasury. "Treasury History Overview." U.S. Department of Treasury. N.p., 27 Nov. 2010. Web. 10 Nov. 2014. The Washington Times. "Summary of the Emergency Economic Stabilization Act of 2008." Washington Times. The Washington Times, 28 Sept. 2008. Web. 10 Nov. 2014. Yahoo! Finance. "C Interactive Stock Chart." Yahoo! Inc. Stock. N.p., 2014. Web. 09 Nov. 2014. Yahoo! Finance. "DJI Interactive Stock Chart." Yahoo! Inc. Stock. N.p., 2014. Web. 09 Nov. 2014. Yahoo! Finance. "GS Interactive Stock Chart." Yahoo! Inc. Stock. N.p., 2014. Web. 09 Nov. 2014. 55 Appendix D Graphs and Diagrams D-­‐1, S&P/Case-­‐Shiller U.S. National Home Price Index Source: Federal Reserve Bank of St. Louis, and S&P Dow Jones Indices LLC. "S&P/Case-­‐
Shiller U.S. National Home Price Index." Federal Reserve Bank of St. Louis. N.p., 2014. Web. 10 Nov. 2014. 56 D-­‐2, Make-­‐up of European countries in the Economic and Monetary Union as of 2014 Source: Wikipedia. "Economic and Monetary Union of the European Union." Wikipedia. Wikimedia Foundation, 2014. Web. 15 Nov. 2014. 57 D-­‐3, Countries involved in the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union Source: Wikipedia. "European Fiscal Compact." Wikipedia. Wikimedia Foundation, 2014. Web. 15 Nov. 2014. 58 D-­‐4, Unemployment rates in Ireland and 12 euro area countries 1993-­‐2011 Source: European Commission. "Ireland's Economic Crisis: How Did It Happen and What Is Being Done about It?" Representation in Ireland. N.p., 12 June 2012. Web. 12 Nov. 2014. 59 D-­‐5, Breakdown of EU-­‐IMF financial assistance program to Ireland Source: European Commission. "Ireland's Economic Crisis: How Did It Happen and What Is Being Done about It?" Representation in Ireland. N.p., 12 June 2012. Web. 12 Nov. 2014. 60 D-­‐6, The 2013 financial results of the main Spanish banks Source: Chislett, William. "Spain's Banking Crisis: A Light in the Tunnel." Real Instituto Elcano. Fundación Real Instituto Elcano, 21 Feb. 2014. Web. 24 Sept. 2014. 61