Financial Crisis Overview 2007-2008

Study Notes

Definitions

Federal Reserve: The US Central Bank; regulates banks, sets interest rates, but does not issue loans.
Subprime Mortgages: Mortgages given to individuals with a higher risk of default, often due to irregular employment or prior debt. (Common in the US and UK/Europe)
Fannie Mae/Freddie Mac: US government-backed mortgage lenders.
Dow Jones: A stock market index that reflects the performance of US shares.
Interbank Lending Market: A market where banks lend to each other.
Libor: London Interbank Offered Rate; the interest rate banks charge for interbank lending.
Mortgage-Backed Securities: Financial assets whose value is derived from mortgages; they can be bought and sold on financial markets.
Auction Rate Securities: Financial assets where large institutions raise money by selling bonds; investors can withdraw their investment through regular auctions.

Timeline of the Crisis (2007-2008)

March 2007: Value of US subprime mortgages estimated at $1.3 trillion.
April 2, 2007: New Century Financial (major US subprime lender) files for bankruptcy.
April 3, 2007: Subprime mortgage lending reached nearly twice the level of three years prior.
July 19, 2007: Dow Jones Industrial Average reached a record high above 14,000.
August 9, 2007: French bank BNP Paribas suspends three investment funds due to a liquidity crisis in subprime mortgages. This prompted European Central Bank intervention.
August 10, 2007: Central banks coordinate efforts to increase liquidity in the market, injecting billions into the US, Europe, and Japan.
August 14, 2007: US and European stock indices fall.
August 16, 2007: Countrywide Financial (largest US mortgage lender) avoids bankruptcy with a large loan.
August 31, 2007: Ameriquest (another large US subprime lender) goes out of business.
September 4, 2007: Libor rate rises to its highest level in years.
September 14, 2007: Merrill Lynch is sold to Bank of America due to liquidity issues.
September 15, 2007: Lehman Brothers files for bankruptcy protection.
September 18, 2007: American International Group receives a $85 billion loan from the Federal Reserve to avoid bankruptcy.
September 28-29, 2007: Belgian government nationalizes Fortis Bank; Citigroup acquires Wachovia operations.
October 2007-June 2008: Multiple banks fail and governments intervene to secure the financial system.

2008 Events

January-August 2008: The US National Association of Realtors reported the biggest drop in existing home sales in 25 years, related to the decline in the market.
February 7, 2008: Freezing of auctions for auction rate securities
February 16, 2008: US investment bank Bear Stearns is acquired by JPMorgan Chase.
July 11, 2008: IndyMac Bank (a subsidiary of Independent National Mortgage Corporation) files for bankruptcy.
July 14–17, 2008: Several UK and other banks face serious problems. Severe losses are reported by major banks and financial institutions
September 7, 2008: Fannie Mae and Freddie Mac (major mortgage lenders) are taken over by the US government.
October 3, 2008: President Bush signs the Emergency Economic Stabilization Act (creation of $700 billion Troubled Asset Relief Program to purchase failing bank assets).
October 6-10, 2008: The Dow Jones suffers some of its worst weekly losses in history of 75 years in history.
October 6, 2008: The Federal Reserve offers a $900 billion stimulus package.
October 7, 2008: The Federal Reserve makes emergency loans of around $1.3 trillion to companies outside the financial sector.
October 8, 2008: Central Banks around the world lower interest rates to try and promote economic activity.
November 12, 2008: The US Treasury changes course in the TARP plan
November 19, 2008: Iceland receives a $4.6 billion IMF-led bailout package
November 24, 2008: US government steps in to rescue Citigroup.
December 21, 2008 :Ireland re-capitalises three major banks (Allied Irish, Anglo Irish, and Bank of Ireland)