Washington Poster Risky Mortgages Are Exploding Again in Echo of Build Up to 2008 Financial Crisis
New Rules for Fannie and Freddie
Congress passes legislation that requires government-sponsored mortgage giants Fannie Mae and Freddie Mac to devote a percentage of their lending to affordable housing. This leads to an increment in the overall number of loans being pooled and securitized or sold every bit financial instruments to other investors. 2 years later, J.P. Morgan introduces the first credit default swap (CDS), a credit derivative that can human activity every bit a kind of insurance against defaults for investors. Over the next decade and a half, CDSes become the nigh widely traded credit derivative product globally. The CDS market proves to exist a major source of systemic chance to the U.South. financial system when the crisis hits more than than a decade afterwards.
In 1995, changes to the Community Reinvestment Act, originally passed to end discrimination against low-income borrowers, allow mortgage lenders to purchase "subprime" securities to fulfill their affordable-housing lending obligations. Some economists argue that the resulting higher demand for subprimes encourages the proliferation of risky housing loans during the latter half of the 1990s. In September 1999, Fannie Mae eases credit requirements to encourage banks to extend loans to people whose credit is lower than what is required for conventional loans, furthering growth in the subprime lending industry.
In November, President Bill Clinton signs off on a law that partially repeals the Drinking glass-Steagall Act of 1933, which had prevented banks from operating other financial businesses, such as insurance and investment brokerages. One year later, new rules exempt credit default swaps and trading on electronic energy commodity markets from regulation.
Federal Reserve Cuts Interest Rates
Prompted by the flare-up of the dot-com chimera and the resulting recession, the U.S. Federal Reserve, led by Alan Greenspan, lowers its criterion interest rate 11 times. Falling interest rates lead to an piece of cake-credit environment, encouraging lending practices that prove unsustainable later in the decade. The ensuing credit bubble plays a large role in the run-up to the financial crisis.
Wall Street Places Riskier Bets
In Apr, the Securities and Exchange Committee (SEC) loosens the internet capital letter rule, which had limited banker-dealers and investment banks to a 12-to-1 leverage (the ratio of debt to equity) on investments. The modify allows firms with more than than $5 billion in avails to leverage themselves an unlimited number of times. Qualifying firms at the fourth dimension include Carry Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley. These firms greatly increase the amount of leverage they employ to a point where they routinely use xxx times leverage on investments. None of the 5 firms survive the 2008 credit crisis intact equally independent investment banks.
U.S. Housing Bubble Bursts
A boom in U.Southward. housing prices abruptly reverses course in 2006. Declines accelerate in 2007, which will come across the largest unmarried-year drop in U.S. home sales in more than two decades. The downturn prompts a plummet of the U.South. subprime mortgage manufacture, which offered loans to individuals with poor credit, sometimes without requiring a down payment. More than twenty-5 subprime lending firms declare bankruptcy in February and March 2007. The plummet rattles the Dow Jones Industrial Boilerplate, which measures the combined stock values of the thirty largest companies in the United States. On February 27, it loses 416 points, its biggest 1-twenty-four hour period point loss since ix/11.
Subprime Bankruptcies Proliferate
In April 2007, New Century Financial Corporation, the largest U.S. subprime lender, files for bankruptcy as analysts worry well-nigh the impact subprime mortgages will take on the broader fiscal sector, which invested heavily in securitized debt from subprime loans. In July, Comport Stearns, i of the largest U.S. investment banks, announces 2 of its hedge funds take lost about all of their investor capital and will file for bankruptcy. It is one of the kickoff signs of major problems in fiscal markets across the subprime loan industry.
Subprime Woes Go Global
Subprime mortgage problems spread worldwide as hedge funds and banks around the earth reveal substantial holdings of mortgage-backed securities. France'southward BNP Paribas announces on August 9 that there is no liquidity in the market for the avails held by three of its hedge funds, equally investors turn down these so-called toxic assets, which are rapidly losing their value. Other European banks follow with similar announcements. The European Primal Bank immediately steps in to offering low-involvement credit lines to support these banks. With lending markets drying upward around the world, the central banks of the United states, the European Union, Australia, Canada, and Nihon coordinate to inject liquidity into credit markets for the first time since nine/11.
Fed Slashes Rates and Market place Peaks
In September, the Federal Reserve makes its first in a series of interest rate cuts, lowering the benchmark federal funds rate for the outset time since 2003, from five.25 percent to iv.75 percent. Past December 2008, the Fed will cut rates to between 0 percentage and 0.25 percent. During this period, the Dow Jones Industrial Average peaks at more than than fourteen,000 points. Past February 2009, the Dow plummets by more fifty percent, to only over 6,500.
Burn Sale of Deport Stearns
Bear Stearns announces major liquidity problems and is granted a twenty-8-24-hour interval emergency loan from the New York Federal Reserve Bank. Investors are fearful that the firm's demise could spark a collapse of the financial sector. Two days later, JPMorgan Chase buys Bear Stearns for $2 per share in a rescue bargain backed past $30 billion in Fed financing. (Later, it will increase its bid to $ten per share.) The banking company traded at a high of $172 per share but weeks earlier. The sudden plummet and burn auction of one of the nigh iconic institutions on Wall Street spark broad fears near the stability of the financial sector.
Government Nationalizes Fannie and Freddie
The U.S. authorities announces it will seize command of federal mortgage insurers Fannie Mae and Freddie Mac, in what is considered Washington's almost dramatic intervention in the credit crisis to date. The two firms are riddled with mortgage defaults, and federal regulators fright their collapse could lead to massive collateral damage for fiscal markets and the U.S. economy.
'Moral Chance' and Lehman's Collapse
Lehman Brothers, a major global investment banking concern and a fixture on Wall Street for more than than 150 years, files for the largest defalcation in U.South. history. The announcement spooks many investors who had causeless the U.Southward. government would act to prevent a bank the size of Lehman from failing. Nevertheless, U.S. Treasury and Fed leaders fear at the time that bailing out Lehman would create "moral chance" within the cyberbanking industry.
Federal Reserve Bails Out AIG
Just a twenty-four hours after Lehman is allowed to collapse, the Fed steps in to rescue American International Group (AIG), the largest insurer in the U.s., with an $85 billion loan. Hours earlier, credit agencies had downgraded AIG, which had bet heavily in the credit default swap marketplace, further undermining investor confidence. Policymakers believe that, unlike Lehman, AIG is "too big to fail" and a collapse would trigger cascading failures throughout the U.Due south. and global financial systems.
Paulson Unveils TARP Rescue Plan
Treasury Secretary Henry Paulson unveils a rescue program dubbed the Troubled Asset Relief Program, or TARP, which aims to use $700 billion of U.S. taxpayer money to stabilize markets. Information technology as well proposes buying troubled avails from the country's largest fiscal firms in the hopes of restoring confidence in credit markets. That November, Paulson abandons the chemical element of the plan aimed at buying these so-chosen toxic assets.
Banking concern Failures Signal End of an Era
Washington Mutual is seized past the Federal Deposit Insurance Corporation (FDIC) and declares defalcation, the largest banking concern failure in U.S. history. Several days subsequently, some other major U.Due south. bank, Wachovia, is purchased by Wells Fargo. Meanwhile, the ii largest U.South. investment banks, Goldman Sachs and Morgan Stanley, denote they will catechumen to bank holding companies, exposing them to additional government regulation only giving them access to more loans from the Fed. The movement marks the terminate of independent investment banks, symbols of Wall Street's success in the 2nd half of the twentieth century.
Dow Finishes Worst Calendar week as Fed Intervenes
The Dow Jones Industrial Boilerplate suffers the worst calendar week of losses in its history, dropping by more than 20 pct. During the course of the week, the Federal Reserve moves to make an additional $900 billion of short-term lending bachelor to banks and announces plans to lend approximately $1.iii trillion to companies outside the financial sector. The central banks of the United States, the EU, Britain, Communist china, Canada, Sweden, and Switzerland make coordinated interest rate cuts. The U.S. economic system sheds 240,000 jobs in October, ushering in a period of heavy task losses that culminates in an unemployment rate of 10 pct a year later.
Fed Announces Quantitative Easing
The Federal Reserve introduces a plan to make large-scale nugget purchases, known as quantitative easing, to push downwards long-term involvement rates and jumpstart economic action. In March 2009, the Fed announces the purchase of $750 billion in mortgage-backed securities and $300 billion in U.Due south. Treasuries. In Nov 2010, the Fed launches a second round of purchases, known as QE2, and in 2012 a third, QE3. By the time the program is wrapped upwardly in 2014, the Fed has expanded its remainder sheet to more than $4 trillion, upwards from less than $1 trillion in 2008.
Bush-league Launches Automobile Bailouts
On Dec 19, the George W. Bush administration announces plans to support two of the "Big Three" U.S. automakers, Full general Motors and Chrysler, with emergency financing totaling more than $17 billion; the third, Ford, avoids a bailout. In February 2009, the companies arroyo the government again for boosted loans of more $20 billion; past June, both have entered bankruptcy. After restructuring, the U.S. Treasury sells its remaining Chrysler stock in 2011 and its concluding GM stock in 2013, losing some $9 billion overall on its machine bailout programs.
Obama's Early on Moves
Amid a wave of global spending on financial stimulus, newly inaugurated President Barack Obama signs a $787 billion stimulus package into law. It wins praise from some economists, who laud Obama'south recognition of the urgency of the moment, but others criticize the bill for raising the debt or focusing on wasteful projects. Meanwhile, Treasury Secretary Timothy Geithner unveils his financial rescue plan, which includes and then-called stress testing for big banks. Information technology also aims to use Federal Reserve lending facilities to free up credit for consumers and small businesses and create a public-private partnership to take troubled avails off of businesses' rest sheets.
G20 Summit Pushes Financial Regulation
Leaders from the Grouping of Xx (G20), representing the earth's leading economies, meet in London, where they pledge to triple funding for the International Budgetary Fund and increase trade financing. The leaders practice not make whatsoever major statement on increasing global stimulus spending, a focus of the Us ahead of the height. Following a major push by France and Germany, the leaders do, however, announce plans to strengthen international fiscal regulation.
U.Due south. Banks Stress Tested
U.S. regulators led by the Federal Reserve release the results of the first cyberbanking stress examination, which set out to appraise the wellness of the country's largest fiscal institutions. Ten of the nineteen companies tested are required to raise boosted capital, a total of $75 billion beyond the system. The subsequent Dodd-Frank fiscal overhaul formalizes the stress test process, leading to yearly tests for U.Southward. fiscal institutions with a certain level of avails.
Dodd-Frank Financial Overhaul Signed
President Barack Obama signs into police force a fiscal reform nib aimed at preventing future financial crises by giving the federal authorities new powers to regulate Wall Street. The pecker, to be implemented over several years, includes the creation of a Consumer Financial Protection Bureau and a Fiscal Services Oversight Council to monitor market stability. The Federal Eolith Insurance Corporation gains the power to seize and dismantle troubled financial firms deemed "as well big to fail," and proprietary trading—when banks invest for their own turn a profit—is banned. The neb also limits the scope of banks' investments in hedge funds and private equity funds.
Occupy Wall Street Taps Into Discontent
On September 17, protesters brainstorm occupying Zuccotti Park, most Wall Street in lower Manhattan, where they remain until authorities expel them in Nov. Objecting to growing wealth inequality and what they run into every bit abuse and favoritism during the corporate bailouts, they inspire similar actions around the world. A year earlier, the so-chosen Tea Party move had gained traction amongst Republicans with like complaints against the TARP program, bank bailouts, and what they considered wasteful spending through Obama's stimulus package.
Regulators Approve Volcker Dominion
Authorized past the Dodd-Frank legislation, regulators finalize the so-called Volcker Rule, originally proposed by old Fed Chairman Paul Volcker. The centre of the rule is to reduce systemic take chances in the U.S. financial arrangement past prohibiting commercial banks from proprietary trading, or using their customers' deposit funds to make risky bets in the market. The rule draws criticism from the banking industry, which argues information technology is too complicated and plush to comply with.
The Treasury sells its remaining shares in Marry Financial, formerly the financing arm of General Motors, offloading its terminal major investment from the Troubled Asset Relief Program. The Obama administration announces that the program resulted in a $15 billion profit, with the government recouping $441 billion on the $426 billion disbursed. Critics maintain that the bailouts created a lasting moral risk for banks and contributed to the polarization of American politics.
Dodd-Frank Repeal Passes Business firm
Republicans in the U.S. Firm of Representatives pass the Financial CHOICE Human action, which would largely dismantle the Dodd-Frank reforms. Provisions include exempting many banks from stress tests, repealing the Volcker Rule, stripping the Consumer Financial Protection Bureau of much of its ability, and easing many other regulations on financial institutions. Withal, the nib in this course fails to advance to the Senate.
Mulvaney Takes Over CFPB
President Donald J. Trump appoints Mick Mulvaney, the head of the Office of Management and Budget, as acting director of the Consumer Financial Protection Agency (CFPB), the fiscal watchdog agency created by Dodd-Frank. Critics accuse Mulvaney, who previously called the CFPB a "sick, lamentable joke," of undermining the agency's mandate by rolling back regulations, slowing enforcement measures, and favoring private lenders. In August 2018, the agency's top student-loan official resigns in protest.
Trump Signs Dodd-Frank Reform Bill
Trump signs the Economical Growth, Regulatory Relief, and Consumer Protection Act, the first major financial legislation since Dodd-Frank. The bill, passed with bipartisan back up in Congress, keeps the Dodd-Frank framework but exempts many smaller banks from the regulatory scrutiny imposed after the crisis. Now, merely fiscal institutions with more than than $250 billion in avails, rather than $50 billion, will exist subject to increased federal oversight, though the nib gives the Fed discretion to include smaller banks if information technology deems necessary.
Source: https://www.cfr.org/timeline/us-financial-crisis
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