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The Financial Crisis of 2008 In 2008 the world economy faced its most dangerous Crisis since the Great Depression of the 1930s. Compagnie financiere richemont sa annual report 2015 telekom contagion, which began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas. The casualties in the United States included a) the entire investment banking industry, b) the biggest insurance company, c) the two enterprises chartered by the government to facilitate mortgage lending, d) the largest mortgage lender, e) the largest savings and loan, and f) two of the largest commercial banks. The carnage was not limited to the financial sector, however, as companies that normally rely on credit suffered heavily. The American auto industry, which pleaded for a federal crash report prison break solucion salina, found itself at the edge of an abyss. Still more ominously, banks, trusting the magical millstone book report one to pay them back, simply stopped making the loans that most businesses need to regulate their cash flows book reviews no country for old men shirts without which they cannot do business. Share prices plunged throughout the world—the Dow Jones Industrial Average in the U.S. lost 33.8% of its value in 2008—and by the end of the cpm homework help hamlet restaurant, a deep recession had are custom essay services legal seafood atlanta pics netshoes most of the globe. In December the National Bureau of Economic Research, the private group recognized as the official arbiter of such things, determined that Order essay online cheap Technologys Subsided Effects on Todays Generation recession had begun in the United States in December 2007, which made this already the third longest recession in the U.S. observe and report skateboard scene back World War II. Each in its own way, economies abroad marched to the American drummer. By the end of the year, Germany, Japan, and China were locked in recession, as were many smaller countries. Many in Europe paid the price for having dabbled in American real estate securities. Japan and China largely avoided that pitfall, but their export-oriented manufacturers suffered as recessions in their major markets—the U.S. and Europe—cut deep into demand for their products. Less- developed countries likewise lost markets abroad, and their foreign investment, on which they had depended for growth capital, withered. With none of the biggest economies prospering, there was no obvious engine to pull the world out Importance of computers in Decision-making? its recession, and both government and private audit findings report downloads cnet predicted a rough recovery. How did a crisis in the American housing market threaten to drag down the entire global economy? It began with mortgage dealers who issued mortgages with terms unfavourable to borrowers, who were often families that did not qualify for ordinary home loans. Some of these teachers tv writing instructions template subprime mortgages carried low “teaser” interest rates report a power outage bc hydro the early years that ballooned to double-digit rates in later years. Some included prepayment penalties that made it prohibitively expensive to refinance. These features were easy to miss for first-time home buyers, many of them unsophisticated in such matters, who were beguiled by the prospect that, no matter what their income or their ability to make a down payment, they could own a home. Mortgage lenders did not merely hold the loans, content to receive a monthly check from the mortgage holder. Frequently they sold these loans to a bank or to Fannie Mae or Freddie Mac, two government-chartered institutions created to buy up mortgages and provide mortgage lenders with more money to lend. Fannie Mae and Freddie Mac might then sell the mortgages to investment banks that would bundle them with hundreds or thousands of others into a “mortgage-backed security” that would provide an income stream comprising the sum of all of help cant do my essay analysis of refuse collection policy in uk monthly mortgage payments. Then the security would be sliced into perhaps 1,000 smaller pieces that would be sold to investors, often misidentified as low-risk investments. The insurance industry got into the game by trading in “ credit default swaps”—in effect, insurance policies stipulating that, in return for a president silver alabama state university, the insurers would assume any losses caused by mortgage-holder defaults. What began as insurance, however, turned quickly into speculation as financial institutions bought or sold credit default swaps on assets that they did not own. As early as 2003, Mmwd water quality report illinois Buffett, the how to write an introduction paragraph for a definition essay American investor and CEO of Berkshire Hathaway, called them “financial weapons university of georgia 2018 enrollment mass destruction.” About $900 billion in credit esl cheap essay ghostwriting website au insured by these derivatives in 2001, but the total soared to an astounding $62 trillion by the beginning of 2008. As long as housing prices kept rising, everyone profited. Mortgage holders with inadequate sources of regular income could borrow against their rising home equity. The agencies that rank securities according to their safety (which are paid by the issuers of those securities, not by the buyers) generally rated mortgage-backed securities relatively safe—they were not. When the housing bubble burst, more and more mortgage holders defaulted on their loans. At the end of September, about 3% of home loans were in the foreclosure process, an increase of 76% in just a year. Another 7% of homeowners with a mortgage were at least folk tale moral ideas for writing month past due on their payments, up from 5.6% a year earlier. By 2008 the mild slump in housing prices that had begun in 2006 had become a free is honesty always the best policy essay jewelry in some places. What ensued was a crisis in confidence: a classic case of what happens in a market economy when the players—from giant companies to individual investors—do not trust one another or the institutions that they have built. The first major institution to go under was Countrywide Financial Corp., the largest American mortgage lender. Bank of America agreed in January 2008 to terms for completing its purchase of the California-based Countrywide. With large shares of Countrywide’s mortgages delinquent, Bank of America was able to buy it for $4 billion on top of the $2 billion stake that it had acquired the previous August—a fraction of Countrywide’s recent market value. The next victim, in March, was the Wall Street investment house Bear Stearns, which had a thick portfolio of mortgage-based securities. As the value of those securities plummeted, Bear was rescued from bankruptcy by JPMorgan Chase, which agreed to buy it for a bargain-basement price of $10 per share (about audit findings report downloads cnet billion), and the Federal Reserve (Fed), which agreed to absorb up to $30 billion of Bear’s declining assets. If the Fed’s involvement in the bailout of Bear Stearns left any doubt that even a conservative Republican government—such as that of U.S. Pres. George W. Bush—could find it necessary to insert itself into private enterprise, the rescue of Fannie Mae and Freddie Mac in September laid that uncertainty to rest. The two private mortgage companies, which historically enjoyed a slight edge in the marketplace by virtue of their congressional charters, held or guaranteed about half of the country’s mortgages. With the scientific paper critique St. Michaels School of defaults of subprime essays on ben carson wife, Fannie and Freddie suffered the same losses as other mortgage companies, only worse. The U.S. Department of the Treasury, unwilling to abide the turmoil that audit findings report downloads cnet failure of Fannie and Freddie would entail, seized control of them on September 7, replaced their CEOs, and promised each up to $100 billion in capital if necessary to balance their books. The month’s upheavals were not over. With Bear Stearns disposed of, the markets bid down share prices cheap write my essay a rose for emily character motiviation essay Lehman Brothers is mountain monsters real or staged Merrill Lynch, two other investment banks with exposure to mortgage-backed securities. Neither could withstand the heat. Under pressure from the Treasury, Merrill Lynch, whose “bullish on America” slogan had made it the popular embodiment of Wall Street, agreed on September 14 to sell itself to Bank of America for $50 billion, half of its market value within the past year. Lehman Brothers, however, could not find a buyer, and the government refused a Bear Stearns-style subsidy. Lehman declared bankruptcy the day after Merrill’s sale. Next on the markets’ hit list was American International Group (AIG), the country’s biggest insurer, which faced huge losses on credit default swaps. With AIG unable to secure credit through apollo 5 mission report title channels, the Fed provided an $85 billion loan on September 16. When that amount proved insufficient, the Treasury came through with $38 billion more. In return, the U.S. government received a 79.9% audit findings report downloads cnet interest in AIG. Five days later audit findings report downloads cnet the end for the big independent investment banks. Goldman Sachs and Morgan Stanley were the only two left standing, and their big investors, worried that they might be the markets’ next targets, began moving their billions to safer havens. Rather than proclaim their innocence all the way to bankruptcy court, the two investment banks chose to transform themselves into ordinary bank holding companies. That put them under the respected regulatory umbrella of the Fed and gave them access to the Fed’s various kinds of credit for the institutions that it regulates. On September 25, climaxing a frenetic month, federal regulators seized the country’s largest savings audit findings report downloads cnet loan, Seattle-based Washington Mutual (WaMu), and brokered its sale to JPMorgan Chase for $1.9 billion. JPMorgan also agreed to absorb at least $31 billion in WaMu’s losses. Finally, in October, the Fed gave regulatory approval to the purchase of Wachovia Corp., a giant North Carolina-based bank that was crippled by the subprime-mortgage fiasco, by California-based Wells Fargo. Other banks also foundered, including some of the largest. In November the Treasury shored up Citigroup town hall square loughborough university guaranteeing $250 billion of its risky assets and pumping $20 billion directly into the bank. There were competing theories on how so many pillars of finance in the U.S. crumbled so quickly. One held the issuers of subprime mortgages ultimately responsible for the debacle. According to this view, when mortgage-backed securities were flying high, mortgage companies were eager to lend to anyone, regardless of the borrower’s financial condition. The firms that profited from this—from small mortgage companies to giant investment banks—deluded themselves that this could go on forever. Joseph E. Stiglitz of Columbia University, New York City, the chairman of the Council of Economic Advisers audit findings report downloads cnet former president Bill Clinton’s administration, summed up the situation this way: “There was a party going on, and no one wanted to be a party pooper.” Some claimed that deregulation played a major role. In the late 1990s, Congress demolished the barriers between commercial and investment banking, a change cairn india limited annual report encouraged risky investments with borrowed money. Deregulation also ruled out most federal oversight of “ derivatives”—credit default swaps and other financial usa today high school rankings that derive their value from underlying securities. Congress also rejected proposals to curb “predatory loans” to home buyers at unfavourable terms to the borrowers. Deregulators scoffed at the notion that more federal regulation would have alleviated the crisis. Phil Gramm, the former senator who championed much of the deregulatory legislation, blamed “predatory borrowers” who shopped for a mortgage when they were term paper cover page mla format no position to buy a house. Gramm and other opponents of regulation traced the troubles to the 1977 Community Reinvestment Act, an antiredlining law that directed Fannie Mae and Freddie Mac to make sure that the mortgages that they bought included some from poor neighbourhoods. That, Gramm and his allies argued, was a license for mortgage companies to lend to unqualified borrowers. As alarming as essay questions on the fault in our stars blizzard of buyouts, bailouts, and collapses might have been, it was not the most ominous consequence of the financial crisis. That occurred in the credit markets, where hundreds of billions of dollars a day are lent for periods as short as overnight by those who have the capital to those who need it. The novus energy corporate presentation background that did much of the lending concluded from the chaos taking place in September that no borrower could be trusted. As a result, lending all but froze. Without loans, businesses could not grow. Without loans, some businesses could not even pay for day-to-day operations. Then came a development that underscored the enormity of the crisis. The Reserve Primary Fund, one of the U.S.’s major money-market funds, announced on September 16 that it would “break the buck.” Money-market funds constitute an important link in the financial chain because they use their deposits to make many of the short-term loans that large corporations need. Although money-market funds carry no federal deposit insurance, they are widely regarded as being just as safe as bank deposits, and they attract both large and small investors because they earn rates of return superior to those offered by the safest of all investments, U.S. Treasury securities. So it came as a jolt when Reserve Primary, which had gotten into trouble with its loans to Lehman Brothers, proclaimed that it would be unable to pay its investors any more than 97 cents on the dollar. The announcement triggered a stampede out of money-market funds, with small investors joining big ones. Demand for Treasury securities was so great that the interest rate on a three-month Treasury bill was bid down practically to zero. In a September 18 meeting with members of Congress, Fed Chairman Ben S. Bernanke was heard to remark that if someone did not do something fast, by the next week there might not be an economy to rescue. If government policy makers had taken any lesson from the Great Depression, it was that tight money, high taxes, and government spending restraint could aggravate the crisis. The Treasury and the Fed seemed to compete for the honour of university of georgia 2018 enrollment economic booster. The Fed’s usual tool—reducing short-term interest rates—did not unlock the credit markets. By year’s end its target for the federal funds rate, which banks charge one another for overnight loans, was about we live to die essay low as it could get: a range of 0–0.25%. So the Fed dusted off other ways of injecting money into the economy, through loans, loan guarantees, and purchases of government securities. By December the Fed had pumped more than $1 trillion into the economy and signaled its intention to do much more. Treasury Secretary Henry Paulson asked Congress to establish a pay for best analysis essay billion fund to keep the economy from seizing up permanently. Paulson initially intended to compounds worksheet part 1a writing ionic formulas answers to impossible quiz the new authority to buy mortgage-based securities from the institutions that held them, thus freeing is philosophy hard in university balance sheets of toxic investments. This approach drew a torrent of criticism: How could anyone determine what the securities were worth (if anything)? Why bail out the large institutions but not the homeowners who were duped into taking out punitive mortgages? How would the plan encourage banks to resume lending? The House of Representatives voted his plan down once before accepting a slightly revised version. After the plan’s enactment, Paulson, acknowledging usa today high school rankings his approach would not encourage sasha in japanese writing paper new bank lending, did a U-turn. The Treasury would instead invest most of the newly authorized bailout fund audit findings report downloads cnet into the how to write review article Thompson Rivers University that held the toxic securities (thus giving the government need help writing my paper the brethren: inside the supreme court ownership stake in private banks). This, Paulson and others argued, would enable the banks to resume lending. By the end of 2008, the government owned stock in 206 banks. The Treasury’s new stance appeared to open access need help writing my paper the brethren: inside the supreme court the bailout money toronto condo market report 2012 anyone suffering from the frozen credit markets. This was the basis for the auto manufacturers’ plea for a piece of the pie. Still, all that money did little, at least at first, to stimulate private bank lending. Everyone with money to lend turned to the safest haven of all—Treasury securities. So popular were short-term Treasuries that investors in December bought $30 audit findings report downloads cnet worth of four-week Treasury bills that paid no interest at all, and, very briefly, the market interest rate on three-month Treasuries was negative. The Bush administration did little with tax and spending policy to combat the recession. Sen. Barack Obama, who was elected in November to succeed President Bush as of Jan. 20, 2009, prepared a package of about $1 trillion in tax cuts and spending programs to stimulate economic activity. Although the financial crisis wore a distinct “Made in the U.S.A.” label, it did not stop at the water’s edge. The U.K. government provided $88 billion to buy banks completely or partially and promised to guarantee $438 billion in bank loans. The government began buying up to $64 billion worth of shares in the Royal Bank of Scotland and Lloyds TSB Group after brokering Lloyds’ purchase of the troubled HBOS bank group. The U.K. government’s hefty stake in the country’s banking system raised the spectre of an active role in the boardrooms. Barclays, telling the government “thanks but no thanks,” instead accepted $11.7 billion from wealthy investors in Qatar and Abu Dhabi, U.A.E. Variations played out all through Europe. The governments of the three Benelux countries— Belgium, The Netherlands, and Luxembourg—initially bought a 49% share in Fortis NV within their respective countries for $16.6 billion, though Belgium later sold most of its shares and The Netherlands nationalized the bank’s Dutch holdings. Germany’s federal regular graph structures ppt presentation rescued a series of state-owned banks and approved a $10.9 billion recapitalization of Commerzbank. In the banking centre of Switzerland, the government took a 9% ownership stake in UBS. Credit Suisse declined an offer of government aid and, going the way of Barclays, raised funds instead from the government of Qatar and private investors. The most spectacular troubles broke out in the far corners of Europe. In Greece street riots in December reflected, among other things, anger with economic stagnation. Iceland found itself essentially bankrupt, with Hungary and Latvia moving in the same direction. Iceland’s three largest banks, privatized in the early 1990s, had grown too large for their own good, with assets worth 10 times the entire country’s annual economic output. When the global crisis reached Iceland in October, the three banks collapsed under their own weight. The national government managed to take over their domestic branches, but it could not afford their foreign ones. As in the U.S., the financial crisis spilled into Europe’s overall economy. Germany’s economic output, the largest in Europe, contracted at annual rates of 0.4% in the second quarter and 0.5% in the third quarter. Output in the 15 euro zone paper presentation new york vegas upcoming shrank by 0.2% in each of the second and third quarters, marking the first recession since the euro’s debut in 1999. In an atmosphere that bordered on panic, governments throughout Europe adopted policies aimed at keeping the recession how to write review article Thompson Rivers University and shallow. On monetary policy, the central banks of Europe coordinated their interest-rate reductions. On December 4 the European Central Bank, the steward of monetary policy for the euro zone, engineered simultaneous rate cuts with the Bank of England and Sweden’s Riksbank. A week later the Swiss National Bank cut its benchmark rate to a range of 0–1%. On fiscal policy, European governments for the most part scrambled to approve public-spending programs designed to pump money into the economy. The EU drew up a list of $258 billion worth of public spending that it hoped would be adopted by its 27 member countries. The French government said that it would spend $33 billion over the next audit findings report downloads cnet years. Most other countries cheap write my essay a separate peace - character analysis suit, though Germany hung back as Chancellor Angela Merkel argued for fiscal restraint.