2008-09 Financial Crisis Overview
Seeds of the Financial Crisis: The financial and economic conditions that led to the financial crisis in the housing and credit
markets are a complicated tangle of excess capital, risky decisions, inadequate regulation, and global interactions. Following is a
broad overview of how the crisis unfolded--although the seeds of the crisis are by no means a neat linear progression of cause and
effect.

In the late 1990s, the high tech bubble burst and the Federal Reserve lowered interest rates—increasing available capital and
kicking off the “housing boom.”

Banks issued “subprime mortgage loans” -- risky loans that start with artificially low “variable” interest rates that increase
dramatically after an initial period.

As long as home prices were rising – largely as a consequence of a speculation bubble – residential mortgage borrowers
who found that they couldn’t afford the higher monthly payments could sell their houses at a profit and pay off the loan.

But when the “housing bubble” burst (in late 2006) and home prices fell, homeowners unable to meet monthly payments
lost their homes in foreclosures, while banks and other mortgage-lenders lost hundreds of billions (unable to recover amounts
loaned).

The financial impact of the foreclosures was greatly magnified throughout the U.S. economy – and the global economy -due to the widespread marketing of “mortgage-backed securities” (MBSs), which bundled thousands of individual
mortgages for re-sale to investors.

Fannie Mae and Freddie Mac, the government sponsored entities created to increase housing credit, were hit especially hard
because of their heavy investment in MBSs—creating another crisis.

Investment banks, also invested heavily in MBSs and in many cases borrowed money to buy them (known as “leveraging”)
– which magnified their financial risk. Bear Stearns – collapsed in 2008 and, as the crisis unfolded, Lehman Brothers went
bankrupt and other investment banks were sold.

In a regulatory move that further magnified the scope of the crisis, investment banks in 2004 had successfully lobbied the
SEC for a weakening of regulations that allowed them to use cash reserves to buy MBSs.

The crisis was further exacerbated by the widespread existence of “credit default swaps” (CDSs) -- where the insurance
giant American International Group (AIG) sold insurance-like products to buyers that covered losses on mortgage-backed
securities.

Credit crunch: Amidst a cascade of fear about the solvency of financial and other institutions heavily invested in MBSs
and CDSs, lenders stopped offering loans and entering into other financial transactions—fearing the borrowers would be
unable to repay the loans.
NOTE ON BUDGET IMPACT: In the following chronology, actions by the Treasury require federal borrowing, which adds
to the accumulated Federal debt. Treasury assistance can come in the form of direct assistance, loan guarantees, lines of credit,
or preferred stock purchases.
By contrast, actions by the Federal Reserve typically involve creating new funds electronically which adds to the money supply
but does not add to the federal debt. The Fed has the authority to loan money “in unusual and exigent circumstances” to any
corporation, provided 5 members of the Board of Governors agree.
KEY DATES and WEBLINKS:
August 31, 2007
Early analysis of the impending financial crisis
http://www.nytimes.com/2007/08/31/business/worldbusiness/31derivatives.html?scp=18sqsubprimemortgagecrisis&st=cse
March 16, 2008
With facilitation from Treasury and the Fed, JP Morgan Chase buys ailing Bear Stearns in the wake of
concerns about the company’s exposure to subprime mortgages
http://www.nytimes.com/2008/03/16/business/16cnd-bear.html?scp=2&sq=BearStearns&st=cse
July 13, 2008
July 30, 2008
Sept 7 – Nov 15, 2008
Sept 7, 2008
Sept 14, 2008
Sept 16, 2008
Sept 19, 2008
Sept 20, 2008
Sept 21, 2008
Sept 25, 2008
Sept 29, 2008
Oct 1, 2008
Oct 3, 2008
Oct 6, 2008
Oct 8, 2008
Oct 14, 2008
Nov 10, 2008
Nov 23, 2008
Nov 25, 2008
Dec 19, 2008
Jan 9, 2009
Jan 12, 2009
Jan 16, 2009
Feb 10, 2009
Feb 17, 2009
Feb 18, 2009
Feb 25, 2009
Treasury announces effort to backstop Fannie and Freddie by increasing their line of credit with the
Treasury http://treasury.gov/press/releases/hp1079.htm
President signs into law the Housing and Economic Recovery Act (HERA) creating the Federal
Housing Finance Agency (FHFA) to regulate Fannie and Freddie
Timeline: 10 weeks of Financial Turmoil (a well organized interactive webpage)
At http://NYTimes.com type into the search box: “10 Weeks of Financial Turmoil”
Fannie and Freddie seized by the federal government. Treasury commits to purchase up to $200 b in
preferred stock under authority granted by HERA. http://treasury.gov/press/releases/hp1129.htm
Lehman files for bankruptcy; Merrill Lynch sold to Bank of America
The Fed loans AIG $85 billion (see Nov 10)
http://www.nytimes.com/2008/09/17/business/17insure.html
Treasury announces guarantee program for money market funds
http://treasury.gov/press/releases/hp1147.htm
Bush Administration requests $700 b from Congress to purchase toxic assets
http://treasury.gov/press/releases/hp1150.htm
The Fed announced that Goldman Sachs and Morgan Stanley would transform themselves into bank
holding companies subject to greater regulation
Washington Mutual became the largest bank failure in US history
House votes down bailout measure; Dow Jones plunges 778 points
Senate approves a revised bailout package 74-25
Revised bailout bill passes House and President Bush signs into law the Emergency Economic
Stabilization Act authorizing up to $700 billion for the TARP (troubled asset relief program)
http://treasury.gov/press/releases/hp1175.htm; Wells Fargo announces intention to purchase Wachovia
Global stock markets plummet
Treasury issues a broad statement on actions to stabilize financial markets
http://treasury.gov/press/releases/hp1189.htm
Treasury, the Fed, and FDIC announce a Capital Purchase Program (TARP money to be injected into
banks instead of purchasing toxic assets); guarantee senior debt at banks; and backstop for commercial
paper (CPFF: Commercial Paper Lending Facility) http://treasury.gov/press/releases/hp1206.htm
http://treasury.gov/press/releases/hp1205.htm
Fed restructures AIG loan and adds additional relief increasing the total to more than $150 b
($60 b loan from Fed; Treasury purchase of $40 b; Fed purchase of MBSs up to $22 b; and Fed loan of
$30 b to backstop credit default swaps) http://treasury.gov/press/releases/hp1261.htm
Treasury, the Fed, and FDIC to shore up Citigroup; Treasury to invest $20b from TARP
http://www.treasury.gov/press/releases/hp1287.htm
Treasury announces it will allocate $20 b of TARP funds to back the TALF (Term Asset-Backed
Securities Loan Facility) established by the Federal Reserve Bank of NY.
http://treasury.gov/press/releases/hp1292.htm
Treasury announces it will make $17 b in TARP loans to GM and Chrysler
http://treasury.gov/press/releases/hp1332.htm
Oversight panel releases report questioning effectiveness and transparency of TARP
http://cop.senate.gov/documents/cop-010909-report.pdf
President Bush, acting on behalf of President-elect Obama, officially informs Congress of Treasury’s
intention to utilize the second $350 b tranche of TARP. NEC Director-Designate Summers releases
letter explaining the request: http://online.wsj.com/public/resources/documents/econletter20090112.pdf
Treasury, Fed, and FDIC to shore up Bank of America against the possibility of large losses resulting
from its acquisition of Merrill Lynch; Treasury to invest $20 b from TARP
http://treasury.gov/press/releases/hp1356.htm
Treasury, Fed, FDIC, Comptroller of Currency, and OTS release outline of Financial Stability Plan
including Capital Assistance Program, Public Private Investment Fund, and expansion of TALF (Term
Asset-Backed Securities Loan Facility) http://treasury.gov/press/releases/tg21.htm
$787 billion stimulus bill signed into law (American Recovery and Reinvestment Act)
http://recovery.gov
President announces details of the Homeowner Affordability and Stability Plan to provide access to
low-cost refinancing, to help at-risk homeowners remain in their homes, and strengthen Fannie Mae and
Freddie Mac http://treasury.gov/press/releases/tg33.htm
Treasury releases details of Capital Assistance Program to evaluate major banks (stress test) and
ensure they have capital and liquidity to restore economic growth
http://treasury.gov/press/releases/tg40.htm
Feb 26, 2009
March 2, 2009
March 3, 2009
March 17, 2009
March 18, 2009
March 19, 2009
March 19, 2009
March 22, 2009
March 23, 2009
March 26, 2009
March 30, 2009
April 21, 2009
May 7, 2009
May 20, 2009
June 17, 2009
President’s Budget includes $250 b contingent reserve for further efforts to stabilize the financial system
(would support $750 b in asset purchases)
http://www.whitehouse.gov/omb/assets/fy2010_new_era/Department of the Treasury.pdf
Treasury and the Fed announce new AIG restructuring plan
http://treasury.gov/press/releases/tg44.htm
Treasury and the Fed announce launch of TALF (Term Asset-Backed Securities Loan Facility) to boost
credit for consumers and small businesses http://treasury.gov/press/releases/tg45.htm
Treasury Secretary Geithner’s letter to Congress on AIG bonuses
http://treasury.gov/press/releases/tg61.htm
Fed announces plan to pump $1.15 trillion into economy
http://federalreserve.gov/newsevents/press/monetary/20090318a.htm
Treasury and HUD launch housing website to facilitate homeowner affordability plan
http://MakingHomeAffordable.gov
Treasury announces auto supplier support program http://treasury.gov/press/releases/tg64.htm
Geithner op-ed on efforts to stabilize the financial system
http://www.financialstability.gov/latest/g_op_ed_3_23.html
Treasury releases details of Public Private Investment Program for purchase of toxic “legacy” assets
http://treasury.gov/press/releases/tg65.htm
Treasury outlines proposed legislation for regulatory reform that would establish a single independent
regulator with responsibility over “systemically important firms,” broker-dealers, investment advisors
and the funds they manage. http://treasury.gov/press/releases/tg72.htm
President says GM must fundamentally restructure to justify an investment of additional tax dollars
and Chrysler must find a partner to remain viable
http://www.whitehouse.gov/blog/09/03/30/GM-and-Chrysler/
International Monetary Fund releases report estimating that banks and other financial institutions face
aggregate losses of $4.05 trillion in the value of their holdings; and of that amount $2.7 trillion is from
loans and assets originating in the U.S. http://www.imf.org/external/pubs/ft/gfsr/2009/01/index.htm
Federal Reserve and the national banking agencies released the results of the bank “stress tests.”
http://treasury.gov/press/releases/tg123.htm
President signs the Helping Families Save Their Homes Act and the Fraud Enforcement and Recover
Act. http://www.whitehouse.gov/blog/Protecting-Homeowners-Protecting-the-Economy/
President Obama announces comprehensive plan for regulatory reform
http://treasury.gov/press/releases/tg175.htm
How it Adds Up $$$
The NYTimes has created a web page, that tabulates the government’s total bailout tab, including actions taken by the Fed and
the Treasury, separately and in collaboration:
http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html
(Note: even though the article is dated Feb. 4, 2009, the NYTimes has been periodically updating the data in the chart.)