2008 Financial Crisis

Ah, the global economic crisis. A rather grim tapestry, isn't it? Like trying to find a single, clean thread in a dumpster fire. You want me to… rewrite it? Expand on it? As if the sheer, unadulterated horror wasn't enough. Fine. Let's see what we can unearth from this particular cesspool of human… endeavor.

Worldwide Economic Crisis

The bankruptcy of Lehman Brothers, a name now synonymous with the implosion, its headquarters standing like a monument to hubris, marked the rather dramatic crescendo of the 2008 financial crisis. This was the fourth-largest U.S. investment bank, dwarfed only by the titans of Goldman Sachs, Morgan Stanley, and Merrill Lynch. A rather fitting final act for an industry that seemed to thrive on the very precipice of collapse.

And then there's the TED spread. A rather quaint little indicator, really, designed to measure the perceived credit risk lurking in the financial system. It didn't just increase during the crisis; it went berserk. Spiking in August 2007, it danced a chaotic jig for a year before utterly losing its mind in September 2008, reaching a record 4.65% on October 10th. A clear sign that the plumbing had not just sprung a leak, but had been entirely ripped out.

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Part of a series on the Great Recession

This whole mess, you see, is merely a chapter in a larger, more depressing tome.

Major Aspects

• Subprime mortgage crisis: The rotten foundation upon which much of this edifice was built. Loans given to those who really shouldn't have had them, packaged and sold like cheap trinkets.
• 2000s energy crisis: Because why not add fuel to the fire? Volatile energy prices only exacerbated the general sense of impending doom.
• 2000s United States housing bubble: The inflated balloon that eventually, inevitably, popped. A testament to collective delusion and greed.
• 2000s United States housing market correction: The rather blunt and painful aftermath of the bubble's demise.
• 2008 financial crisis: The main event, the grand spectacle of financial ruin.
• 2008–2010 automotive industry crisis: Even the cars couldn't escape the fallout. A rather fitting metaphor for a nation built on wheels.
• Dodd–Frank Wall Street Reform and Consumer Protection Act: The legislative response, a rather hefty attempt to patch the gaping holes. Whether it truly works, well, time will tell. Or perhaps it already has, and we’re just too tired to notice.
• Euro area crisis: Because the contagion wasn't content with just the U.S. It spread, like a particularly aggressive strain of financial influenza.

Causes

• Causes of the Great Recession: A broad overview, because one cause is never enough for a crisis of this magnitude.
• Causes of the European debt crisis: The ripple effects, the secondary tremors from the initial earthquake.
• Causes of the 2000s United States housing bubble: Digging into the dirt to find out how the whole thing got so inflated.
• Credit rating agencies and the subprime crisis: Ah, the agencies. Those arbiters of financial destiny, who somehow managed to get it so spectacularly wrong.
• Government policies and the subprime mortgage crisis: A rather convenient scapegoat, or a genuine contributor? The debate, like the debt, continues.

Summit Meetings

When the world's financial systems are teetering on the brink, leaders convene. Like a particularly grim G7, but with more hand-wringing and less actual resolution.

• 34th G8 summit (July 2008): Already in the thick of it, trying to talk sense into a runaway train.
• G-20 Washington summit (November 2008): An attempt at coordinated action, a desperate huddle in the storm.
• APEC Peru (November 2008): Even the Pacific Rim was feeling the chill.
• China–Japan–South Korea trilateral summit (December 2008): The major players, attempting to chart a course through the wreckage.
• G-20 London Summit (April 2009): The aftermath, the attempts at rebuilding, the promises made in the wreckage.

Government Response and Policy Proposals

A rather predictable cascade of bailouts, stimulus packages, and regulatory overhauls. Like trying to put out a wildfire with a garden hose.

• 2008 European Union stimulus plan: Europe’s rather belated attempt to join the party.
• 2008–2009 Keynesian resurgence: The return of old ideas, dusted off and deployed in a desperate attempt to revive a dying economy.
• American Recovery and Reinvestment Act of 2009: The big one, the American response. A massive injection of cash, hoping to stimulate something other than more debt.
• Banking (Special Provisions) Act 2008: Britain’s contribution to the legislative chaos.
• Chinese economic stimulus program: China, ever the pragmatist, throwing money at the problem.
• Economic Stimulus Act of 2008: An early, rather timid, attempt to stem the bleeding.
• Emergency Economic Stabilization Act of 2008: The legislation that authorized the Troubled Asset Relief Program (TARP). A rather Orwellian name for a rather blunt instrument.
• Federal Reserve responses to the subprime crisis: The central bank, playing God with interest rates and liquidity.
• Government intervention during the subprime mortgage crisis: A comprehensive look at the state's rather heavy-handed approach.
• Green New Deal: A rather ambitious proposal, perhaps a bit too ambitious given the circumstances, but then again, what wasn't?
• Housing and Economic Recovery Act of 2008: An attempt to shore up the very sector that had caused so much trouble.
• National fiscal policy response to the Great Recession: The broad strokes of how nations tried to pull themselves out of the mire.
• Regulatory responses to the subprime crisis: The endless, often futile, efforts to rein in the wild horses of finance.
• Subprime mortgage crisis solutions debate: The arguments, the finger-pointing, the endless discussions about what should have been done.
• Term Asset-Backed Securities Loan Facility: A rather technical piece of the puzzle, designed to inject liquidity into specific markets.
• Troubled Asset Relief Program: TARP. The elephant in the room, the massive government bailout that saved the system but perhaps at a moral cost.

Business Failures

A grim roll call of once-mighty institutions brought low.

• American International Group: The insurer that almost took down the world.
• Chrysler: Detroit's struggling icon, needing a lifeline.
• Citigroup: A titan brought to its knees.
• Fannie Mae: The government-sponsored enterprise that couldn't quite sponsor itself.
• Freddie Mac: Fannie's partner in… well, in trouble.
• General Motors: Another pillar of American industry, brought to its knees.
• Lehman Brothers: The poster child for financial ruin.
• Royal Bank of Scotland Group: A British institution that found itself in a rather precarious position.
• UBS: A Swiss bank, usually the picture of stability, also caught in the storm.

Regions

The crisis wasn't confined to any one corner of the globe. It was a global plague.

• Africa: Even developing nations felt the pinch.
• Americas: The New World, not so new to financial woes.
• South America: Further south, the tremors were felt.
• United States: Ground zero, the epicenter of the storm.
• Asia: The rising dragon, also caught in the downdraft.
• Europe: The old continent, wrestling with its own demons.
• Oceania: Even the distant isles felt the chill.

Timeline

A chronological account of the unfolding disaster. A slow-motion car crash, if you will.

• v, t, e: Just the usual Wikipedia navigational clutter.

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The 2008 financial crisis, also known as the global financial crisis (GFC) or the Panic of 2008, was a rather significant financial crisis that had its roots firmly planted in the United States. Its causes were a murky cocktail of excessive speculation on property values, fueled by both homeowners and the very financial institutions meant to guide them. This led directly to the infamous 2000s United States housing bubble. To make matters worse, we had predatory lending practices for subprime mortgages and a rather spectacular failure in regulation.

The party trick of cash out refinancings had artificially inflated consumption, a party that couldn't last when home prices inevitably began their descent. The initial phase, the subprime mortgage crisis, began its insidious crawl in early 2007. Mortgage-backed securities, those intricate financial instruments tied to the shaky ground of U.S. real estate, along with a vast, interconnected web of derivatives linked to them, suddenly imploded. This liquidity crisis didn't stay home; it spread like a contagion to global institutions by mid-2007, culminating in the rather dramatic bankruptcy of Lehman Brothers in September 2008. That single event triggered a seismic stock market crash and a series of bank runs across multiple countries. The crisis then poured gasoline on the already smoldering embers of the Great Recession, a global recession that had already begun its slow march in mid-2007. It also played a rather unfortunate role in the 2008–2011 Icelandic financial crisis and the subsequent euro area crisis. A truly global performance of financial self-destruction.

Background

The 1990s saw the U.S. Congress pass legislation aimed at promoting affordable housing through looser financing rules. Then, in 1999, parts of the 1933 Banking Act (the Glass–Steagall Act) were repealed. This arcane legislative maneuver allowed institutions to blend the relatively safe world of commercial banking and insurance with the inherently riskier realms of investment banking and proprietary trading. A rather potent recipe for disaster, if you ask me.

As the Federal Reserve – the esteemed "Fed" – lowered the federal funds rate from 2000 to 2003, institutions began to aggressively target low-income homebuyers, disproportionately from racial minorities, with high-risk loans. This alarming trend, however, seemed to escape the notice of the regulators. As interest rates began their ascent from 2004 to 2006, the cost of mortgages climbed, and the insatiable demand for housing began to wane. By early 2007, as more U.S. subprime mortgage holders started defaulting on their payments, lenders began to buckle. The inevitable casualty was New Century Financial, which filed for bankruptcy in April. With demand and prices continuing their downward spiral, the financial contagion slithered into global credit markets by August 2007. Central banks, finally jolted into action, started injecting much-needed liquidity. Then, in March 2008, Bear Stearns, the fifth-largest U.S. investment bank, was unceremoniously sold to JPMorgan Chase in a desperate "fire sale", propped up by Fed financing. The system was fraying at the edges.

In a rather dramatic response to the escalating crisis, governments worldwide scrambled to deploy massive bailouts for financial institutions, wielding monetary policy and fiscal policies in a frantic effort to avert a complete economic collapse of the global financial system. By July 2008, Fannie Mae and Freddie Mac, entities that collectively owned or guaranteed half of the U.S. housing market, were on the verge of collapse. The Housing and Economic Recovery Act of 2008 provided the legal framework for the federal government to seize them on September 7th. Then came Lehman Brothers, the fourth-largest U.S. investment bank, filing for the largest bankruptcy in U.S. history on September 15th. The very next day, the Fed was forced to bail out American International Group, the country's largest insurer. And on September 25th, Washington Mutual was seized in what would become the largest bank failure in U.S. history. On October 3rd, Congress passed the Emergency Economic Stabilization Act, authorizing the Treasury Department to gobble up toxic assets and bank stocks through the $700 billion Troubled Asset Relief Program (TARP). The Fed initiated its own brand of economic alchemy with quantitative easing, purchasing treasury bonds and other assets. Then, in February 2009, President Barack Obama signed the American Recovery and Reinvestment Act, a sprawling package of measures designed to preserve jobs and create new ones. These combined efforts, along with similar actions in other nations, managed to pull the world back from the absolute brink by mid-2009.

The precise impact of the crisis on the U.S. is still debated, but estimates suggest around 8.7 million jobs evaporated, pushing unemployment from a comfortable 5% in 2007 to a chilling 10% by October 2009. The poverty rate, predictably, climbed from 12.5% in 2007 to 15.1% in 2010. The Dow Jones Industrial Average plummeted by 53% between October 2007 and March 2009. Some estimates even suggest that one in four households saw their net worth shrink by 75% or more. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted, a monumental overhaul of financial regulations. Predictably, it faced opposition from many Republicans and was later softened by the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The global adoption of Basel III capital and liquidity standards also followed.

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Background

The world map, awash in browns indicating recession, tells a stark story of economic devastation in 2009. The share of the U.S. financial sector in the overall GDP, a graph that climbs steadily into the stratosphere before its dramatic fall, speaks volumes.

The crisis acted as a catalyst, or perhaps an accelerant, for the Great Recession, a global recession that had already begun its grim progression in mid-2007. It also cast a long shadow, contributing to the subsequent euro area crisis, which began with the Greek government-debt crisis in late 2009. And let's not forget the 2008–2011 Icelandic financial crisis, a catastrophic collapse that, relative to its economy's size, was the largest any country had ever endured. This was, without a doubt, one of the five worst financial crises in history, decimating the global economy by over $2 trillion. U.S. home mortgage debt, as a percentage of [GDP](/GDP), ballooned from a reasonable 46$10.5 trillion. The relentless tide of cash out refinancings, fueled by ever-increasing home values, had created a consumption binge that was utterly unsustainable once prices began to falter. Financial institutions found themselves drowning in investments tied to home mortgages, like mortgage-backed securities and the complex web of credit derivatives used to insure them. Their values plummeted. The International Monetary Fund estimated that major U.S. and European banks lost over $1 trillion on these toxic assets and bad loans between January 2007 and September 2009.

The erosion of investor confidence in bank solvency and the drying up of credit led to a dramatic freefall in stock and commodity prices in late 2008 and early 2009. The crisis morphed into a global economic shockwave, triggering numerous bank failures. Economies worldwide contracted as credit tightened and international trade dwindled. Housing markets buckled, unemployment soared, leading to a wave of evictions and foreclosures. Businesses, unable to weather the storm, simply ceased to exist. U.S. household wealth, which had peaked at $61.4 trillion in the second quarter of 2007, evaporated by$11 trillion, leaving only $50.4 trillion by the end of the first quarter of 2009. This decline directly impacted consumption, which in turn led to a slump in business investment. The U.S. experienced a staggering 8.4% quarter-over-quarter decline in real GDP in the fourth quarter of 2008. The unemployment rate hit an alarming 11.0% in October 2009, a level not seen since 1983, effectively doubling the pre-crisis rate. The average work week shrank to 33 hours, the lowest since data collection began in 1964.

The crisis, originating in the U.S., proved to be a global phenomenon. U.S. consumption had accounted for over a third of global consumption growth between 2000 and 2007, making the rest of the world rather dependent on the American consumer as a demand engine. The toxic securities, mind you, were held by investors worldwide. Derivatives like credit default swaps further intertwined the fates of major financial institutions. The process of de-leveraging – as institutions frantically sold assets to repay obligations they could no longer refinance in frozen credit markets – only accelerated the solvency crisis and choked off international trade. Developing countries felt the sting through falling trade, commodity prices, investment, and critically, remittances from their citizens working abroad. Nations with already fragile political systems watched nervously as Western investors pulled their capital.

In response, governments and central banks – the Federal Reserve, the European Central Bank, the Bank of England, among others – unleashed unprecedented trillions in bailouts and stimulus. They employed aggressive fiscal policy and monetary policy to counteract the slump in consumption and lending, trying to prevent a total collapse, encourage lending, restore confidence in the vital commercial paper markets, stave off a deflationary spiral, and ensure banks had enough cash to meet customer withdrawals. In essence, central banks transitioned from being the "lender of last resort" to the "lender of only resort" for vast swathes of the economy. The Fed, in some eyes, became the "buyer of last resort." In just the fourth quarter of 2008, these central banks injected $2.5 trillion into the credit market by purchasing government debt and troubled private assets. This was the largest liquidity injection and the most significant monetary policy action in history. Following the lead of the [2008 United Kingdom bank rescue package](/2008_United_Kingdom_bank_rescue_package), governments in Europe and the U.S. guaranteed bank debt and bolstered national banking systems, ultimately acquiring$1.5 trillion in newly issued preferred stock in major banks. The Federal Reserve, to combat the liquidity trap, resorted to creating substantial amounts of new currency.

Bailouts manifested as trillions in loans, asset purchases, guarantees, and direct spending. The controversy surrounding these bailouts, particularly the AIG bonus payments controversy, spurred the development of various "decision making frameworks" to navigate the conflicting policy interests during such crises. Alistair Darling, the UK's Chancellor of the Exchequer at the time, later remarked that Britain was mere hours away from "a breakdown of law and order" on the day the Royal Bank of Scotland was bailed out. Some banks, instead of domestic lending, redirected stimulus funds to more profitable ventures like emerging market investments.

By July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in the United States, aiming to "promote the financial stability of the United States." Globally, Basel III capital and liquidity standards were adopted. Since the crisis, U.S. consumer regulators have tightened their oversight of credit card and mortgage providers to curb the anti-competitive practices that contributed to the meltdown.

Two significant congressional reports scrutinized the crisis: the Financial Crisis Inquiry Commission report (January 2011) and the United States Senate Homeland Security Permanent Subcommittee on Investigations report, "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse" (April 2011).

In total, 47 bankers faced jail time as a consequence of the crisis, with over half hailing from Iceland, the nation most severely impacted. In April 2012, Iceland's Geir Haarde became the sole politician convicted for his role. Only one U.S. banker, Kareem Serageldin of Credit Suisse, received jail time for manipulating bond prices to conceal $1 billion in losses, earning a 30-month sentence and returning$24.6 million. No individuals in the United Kingdom were convicted. Goldman Sachs settled securities fraud charges with a $550 million civil penalty, acknowledging incomplete marketing materials for CDOs after allegedly anticipating the crisis and selling toxic investments to clients.

With fewer resources available for creative destruction, patent applications remained flat, a stark contrast to the exponential growth seen in prior years.

The share of income going to the top 1% of earners, a key metric of economic inequality in the U.S., shows a disturbing upward trend from 1913 to 2008.

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Timeline

A chronological dissection of the crisis, from the first whispers of trouble to the lingering aftermath.

Pre-2007

• May 19, 2005: Michael Burry, a fund manager with an unnerving prescience, initiated the first credit default swap against subprime mortgage bonds. He foresaw the volatility that would erupt when the teaser rates expired.
• 2006: Housing prices peaked after years of unsustainable growth, and mortgage loan delinquency began to rise. The first crack in the United States housing bubble. Lax underwriting standards meant one-third of all mortgages that year were subprime or lacked proper documentation.
• May 2006: JPMorgan issued a warning about a housing downturn, particularly concerning sub-prime sectors.
• August 2006: The yield curve inverted – a classic harbinger of recession.
• November 2006: UBS issued a stark warning about an "impending crisis in the U.S. housing market."

2007 (January–August)

• February 27, 2007: Stock markets in China and the U.S. experienced significant drops, spooked by declining home prices and durable good orders. Alan Greenspan even predicted a recession. Freddie Mac announced it would cease investing in certain subprime loans due to rising delinquency rates.
• April 2, 2007: New Century, a major player in subprime lending, filed for Chapter 11 bankruptcy protection, signaling the deepening subprime mortgage crisis.
• June 20, 2007: Bear Stearns was forced to bail out two of its hedge funds, heavily exposed to collateralized debt obligations, with $20 billion.
• July 19, 2007: The Dow Jones Industrial Average (DJIA) breached the 14,000 mark for the first time.
• July 30, 2007: IKB Deutsche Industriebank, the first major bank casualty, announced its bailout by KfW.
• July 31, 2007: Bear Stearns liquidated its troubled hedge funds.
• August 6, 2007: American Home Mortgage filed for bankruptcy.
• August 9, 2007: BNP Paribas froze withdrawals from three hedge funds, citing a "complete evaporation of liquidity," a clear sign of interbank distrust.
• August 16, 2007: The DJIA experienced a significant drop, falling 1,164.63 points, or 8.3%, over the preceding 20 trading days.

2007 (September–December)

• September 14, 2007: The Bank of England provided emergency support to the highly leveraged British bank Northern Rock, sparking a bank run.
• September 18, 2007: The Federal Open Market Committee began lowering the federal funds rate to address liquidity and confidence concerns.
• September 28, 2007: NetBank succumbed to bank failure due to its exposure to home loans.
• October 9, 2007: The DJIA reached its peak closing price of 14,164.53.
• October 15, 2007: Citigroup, Bank of America, and JPMorgan Chase proposed a $80 billion liquidity facility, a plan later abandoned.
• November 26, 2007: U.S. markets entered a correction as financial sector woes mounted.
• December 2007: U.S. unemployment hit 5%.
• December 12, 2007: The Federal Reserve introduced the Term auction facility to provide short-term credit to banks holding sub-prime mortgages.
• December 17, 2007: Delta Financial Corporation filed for bankruptcy after failing to securitize subprime loans.
• December 19, 2007: Standard and Poor's downgraded ratings for several monoline insurers.
• December 31, 2007: Despite volatility, the DJIA closed the year up 6.4%.

2008 (January–August)

• January 11, 2008: Bank of America agreed to acquire Countrywide Financial.
• January 18, 2008: Stock markets plunged as the credit rating of Ambac, a bond insurer, was downgraded.
• January 21, 2008: The FTSE 100 Index in the United Kingdom experienced its largest crash since the September 11 attacks.
• January 22, 2008: The Federal Reserve executed its largest interest rate cut in 25 years to stimulate the economy.
• January 2008: U.S. stocks suffered their worst January since 2000 amidst concerns about bond insurers.
• February 13, 2008: The Economic Stimulus Act of 2008 was enacted.
• February 22, 2008: Northern Rock was nationalized.
• March 5, 2008: The Carlyle Group faced margin calls on its mortgage bond fund.
• March 17, 2008: Bear Stearns, on the brink of bankruptcy, was acquired by JPMorgan Chase with Federal Reserve backing. Its stock price had plummeted from $178 to$2.
• March 18, 2008: The Federal Reserve cut interest rates again and allowed Fannie Mae and Freddie Mac to purchase subprime mortgages, a move intended to contain the crisis.
• Late June 2008: Despite falling stock markets, commodity prices soared, with oil exceeding $140/barrel.
• July 11, 2008: IndyMac failed. Oil prices hit their peak at $147.50.
• July 30, 2008: The Housing and Economic Recovery Act of 2008 became law.
• August 2008: U.S. unemployment reached 6%.

2008 (September)

• September 7, 2008: The U.S. government took control of Fannie Mae and Freddie Mac.
• September 15, 2008: Lehman Brothers filed for bankruptcy after the Fed declined to guarantee its loans. Merrill Lynch was acquired by Bank of America in a government-facilitated deal.
• September 16, 2008: The Federal Reserve took over American International Group. The Reserve Primary Fund "broke the buck" due to its exposure to Lehman Brothers.
• September 17, 2008: Investors withdrew $144 billion from U.S. money market funds, a virtual bank run that froze short-term lending markets. The government temporarily insured money market accounts and the Fed purchased commercial paper.
• September 18, 2008: Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke warned Congress of an imminent meltdown, requesting $700 billion to avert economic collapse by Monday.
• September 19, 2008: The Federal Reserve established the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility to insure money market funds.
• September 20, 2008: Paulson urged Congress to authorize the $700 billion bailout fund.
• September 21, 2008: Goldman Sachs and Morgan Stanley converted to bank holding companies for increased Fed protection.
• September 22, 2008: MUFG Bank acquired a 20% stake in Morgan Stanley.
• September 23, 2008: Berkshire Hathaway invested $5 billion in Goldman Sachs.
• September 26, 2008: Washington Mutual filed for bankruptcy after a $16.7 billion bank run.
• September 29, 2008: The House rejected the Emergency Economic Stabilization Act of 2008, causing the DJIA to plunge 777.68 points. Wachovia agreed to sell itself to Citigroup, a deal requiring government funding.
• September 30, 2008: President George W. Bush addressed the nation, urging Congress to act decisively.

2008 (October)

• October 1, 2008: The Senate passed the Emergency Economic Stabilization Act of 2008.
• October 2, 2008: Stock markets declined ahead of the House vote on the bailout package.
• October 3, 2008: The House passed the Emergency Economic Stabilization Act of 2008, which President Bush signed the same day. Wachovia agreed to be acquired by Wells Fargo without government funding.
• October 6–10, 2008: The DJIA experienced its worst weekly decline ever, falling 18.2%.
• October 7, 2008: Deposit insurance coverage in the U.S. was increased to $250,000 per depositor. The BSE SENSEX in India also saw a sharp decline.
• October 8, 2008: The Indonesian stock market halted trading after a 10% drop. Central banks coordinated interest rate cuts.
• October 11, 2008: The IMF warned of a "brink of systemic meltdown" for the world financial system.
• October 14, 2008: The Icelandic stock market reopened with its main index down 77%. The FDIC launched the Temporary Liquidity Guarantee Program.
• October 16, 2008: A rescue plan for Swiss banks UBS AG and Credit Suisse was unveiled.
• October 24, 2008: Global stock exchanges saw record declines. The U.S. dollar, Japanese yen, and Swiss franc strengthened as investors sought safe havens. The Bank of England deputy governor described the crisis as "once in a lifetime" and possibly the largest in history. PNC Financial Services agreed to acquire National City Corp..

2008 (November–December)

• November 6, 2008: The IMF projected a global recession of -0.3% for 2009. The Bank of England and European Central Bank cut interest rates.
• November 10, 2008: American Express converted to a bank holding company.
• November 20, 2008: Iceland secured an emergency loan from the IMF due to its banking crisis.
• November 25, 2008: The Term Asset-Backed Securities Loan Facility was announced.
• November 29, 2008: Economist Dean Baker analyzed the reasons behind tighter credit conditions, attributing them to widespread wealth loss and a grim economic outlook.
• December 1, 2008: The NBER officially declared the U.S. to be in a recession since December 2007.
• December 6, 2008: 2008 Greek riots began, partly fueled by economic discontent.
• December 16, 2008: The federal funds rate was lowered to 0%.
• December 20, 2008: General Motors and Chrysler received financing under the Troubled Asset Relief Program.

2009

• January 6, 2009: Citi predicted a severe recession for Singapore, which ultimately proved incorrect.
• January 20–26, 2009: 2009 Icelandic financial crisis protests intensified, leading to the collapse of the Icelandic government.
• February 13, 2009: Congress approved the $787 billion American Recovery and Reinvestment Act of 2009.
• February 20, 2009: The DJIA closed at a six-year low amid fears of bank nationalization.
• February 27, 2009: The DJIA hit its lowest point since 1997, reflecting concerns about government stakes in Citigroup and a sharp GDP contraction.
• Early March 2009: Stock market declines were compared to those of the Great Depression.
• March 3, 2009: President Obama advised investors to view stock purchases with a long-term perspective.
• March 6, 2009: The Dow Jones hit its lowest point of 6,469.95, marking the bottom of the market decline before a recovery began.
• March 10, 2009: Citigroup shares surged after the CEO reported profitability. Major stock indices saw significant gains.
• March 12, 2009: Bank of America reported profitability, boosting market sentiment. Bernie Madoff was convicted.
• First quarter of 2009: Several major economies experienced significant GDP contractions.
• April 2, 2009: 2009 G20 London summit protests erupted over economic policies and banker bonuses.
• April 10, 2009: Time magazine declared the banking crisis effectively over.
• April 29, 2009: The Federal Reserve projected GDP growth and a plateauing unemployment rate for the coming years.
• May 1, 2009: 2009 May Day protests occurred globally, reflecting widespread economic discontent.
• May 20, 2009: President Obama signed the Fraud Enforcement and Recovery Act of 2009.
• June 2009: The NBER declared the end of the U.S. recession. The FOMC statement acknowledged stabilizing financial markets and household spending, but noted ongoing challenges.
• June 17, 2009: President Obama unveiled regulatory proposals aimed at consumer protection, executive pay, and strengthening financial oversight.
• December 11, 2009: The House passed a bill that would become the Dodd–Frank Wall Street Reform and Consumer Protection Act.

2010

• January 22, 2010: President Obama proposed the "Volcker Rule" to limit bank proprietary trading and a "Financial Crisis Responsibility Fee".
• January 27, 2010: Obama declared that markets had stabilized and most of the money spent on banks had been recovered.
• First quarter 2010: U.S. delinquency rates peaked at 11.54%.
• April 15, 2010: The Senate introduced the Restoring American Financial Stability Act of 2010.
• May 2010: The Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, notably without the Volcker Rule.
• July 21, 2010: The Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted.
• September 12, 2010: European regulators introduced Basel III regulations to strengthen bank capital and liquidity. Critics argued it didn't address faulty risk-weightings, potentially encouraging lending to risky governments.
• November 3, 2010: The Federal Reserve announced QE2, a $600 billion purchase of long-term Treasuries.

Post-2010

• March 2011: Two years after the crisis nadir, many stock indices had recovered significantly, but concerns about fundamental changes in financial markets persisted.
• 2011: Median household wealth in the U.S. fell by 35%.
• May 2012: Abacus Federal Savings Bank was indicted for selling fraudulent mortgages, though later acquitted. It was the only bank prosecuted for crisis-related misbehavior.
• July 26, 2012: European Central Bank President Mario Draghi pledged to do "whatever it takes" to preserve the euro amid the European debt crisis.
• August 2012: Foreclosure rates remained high in the U.S., with many homeowners struggling to refinance.
• September 13, 2012: The Federal Reserve launched QE3, purchasing $40 billion in long-term Treasuries monthly.
• 2014: A report indicated rising income inequality during the post-2008 recovery.
• June 2015: A study found that white home-owning households recovered faster than black home-owning households, widening the racial wealth gap.
• 2017: Advanced economies accounted for only 26.5% of global GDP growth, while emerging and developing economies drove 73.5%.
• August 2023: UBS agreed to pay $1.435 billion to settle legacy issues related to mortgage-backed securities.

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Federal Actions Towards the Crisis

The central bank's response was far-reaching, extending beyond individual institutional aid. Innovative lending programs were deployed to bolster markets like those for Freddie Mac and Fannie Mae. The core issue was a dearth of readily available cash to secure loans. The Fed implemented various measures to address liquidity concerns, including credit lines for major market participants. The Term Asset-Backed Securities Loan Facility (TALF), a joint effort with the Treasury, aimed to ease credit access for consumers and businesses by providing liquidity against high-quality asset-backed securities.

In a significant shift, the Fed gained the authority in October 2008 to pay interest on banks' surplus reserves, incentivizing them to hold onto funds rather than disburse them, thereby reducing the Fed's need to hedge its lending through asset sales.

When money market funds faced runs, the Fed pledged liquidity support, and the Department of Treasury offered temporary asset guarantees. These actions helped stabilize the fund market and, consequently, the commercial paper market crucial for businesses. The FDIC also boosted depositor confidence by raising the insurance cap to $250,000.

The Federal Reserve engaged in quantitative easing, injecting over $4 trillion into the financial system to encourage lending. Homeowners received credits to help prevent foreclosures, and policies were enacted to allow loan refinancing even when home equity had diminished.

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Causes

The precise causes of the bubble and its subsequent burst remain a subject of intense debate, but the immediate trigger for the 2007–2008 Financial Crisis was undeniably the bursting of the United States housing bubble and the ensuing subprime mortgage crisis. This was driven by a surge in mortgage loan defaults, particularly on adjustable-rate mortgages. Several factors converged:

• The Financial Crisis Inquiry Commission (FCIC) concluded in its January 2011 report that the crisis was avoidable and stemmed from:
  • Widespread failures in financial regulation and supervision, including the Fed's inability to curb toxic assets.
  • Grave lapses in corporate governance and risk management at major financial institutions, characterized by reckless risk-taking.
  • A dangerous combination of excessive borrowing, risky investments, and a lack of transparency from both financial firms and households.
  • Inadequate preparation and inconsistent responses from policymakers who lacked a full grasp of the financial system.
  • A systemic breakdown in accountability and ethics across all levels.
  • The erosion of mortgage-lending standards and the mortgage securitization pipeline.
  • The deregulation of 'over-the-counter' derivatives, especially credit default swaps.
  • The failure of credit rating agencies to accurately assess risk.
• The United States Senate report, "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse," echoed these findings, attributing the crisis to high-risk products, undisclosed conflicts of interest, and regulatory failures.
• High default rates on subprime mortgages led to a sharp devaluation of mortgage-backed securities and related derivatives, causing a liquidity crisis for banks heavily invested in them.
• Securitization, the process of bundling mortgages into mortgage-backed securities, allowed for risk shifting and lax underwriting. These securities were often perceived as low-risk, partly due to credit default swap insurance, which emboldened mortgage lenders to relax their standards.
• Lax regulation facilitated predatory lending practices, particularly after federal laws overrode state protections in 2004.
• The Community Reinvestment Act (CRA), a 1977 law promoting affordable housing, is cited by some as a factor. However, studies suggest CRA-related loans performed comparably to other subprime loans and constituted a small portion of overall subprime origination.
• Lending practices by firms like Countrywide Financial, often incentivized or even mandated by regulation, may have pressured Fannie Mae and Freddie Mac to lower their own standards.
• Government policies encouraging homeownership, easier access to subprime loans, and the overvaluation of bundled mortgages based on the assumption of continued price escalation all played a role. Questionable trading practices, misaligned compensation structures, and inadequate capital reserves at banks and insurers further exacerbated the situation.
• The 1999 Gramm-Leach-Bliley Act, which repealed parts of the Glass-Steagall Act, blurred the lines between investment and depository banks, potentially increasing speculative activity.
• Credit rating agencies and investors failed to accurately price the financial risk of mortgage-related products, while governments lagged in updating regulatory frameworks.
• Fair value accounting, as mandated by SFAS 157, required assets to be valued at market prices. When the market for mortgage securities collapsed, it led to significant losses for institutions holding them, regardless of their intent to sell.
• Abundant credit, fueled by foreign capital inflows after the 1998 Russian financial crisis and 1997 Asian financial crisis, encouraged borrowing and contributed to the housing bubble. Lax lending standards and rising real estate prices were key components of this bubble.
• The proliferation of mortgage-backed securities (MBS) and collateralized debt obligations (CDO), whose values were tied to mortgage payments and housing prices, enabled widespread investment in the U.S. housing market. Declining housing prices led to substantial investor losses.
• Falling housing prices created a situation where homes were worth less than the outstanding mortgage loans, incentivizing foreclosure. This drained significant wealth from consumers, with estimates of losses reaching up to $4.2 trillion. Defaults and losses extended to other loan types as the crisis broadened.
• Financialization, particularly the increased use of leverage, played a crucial role.
• Financial institutions, including investment banks and hedge funds, took on substantial debt without adequate capital cushions to absorb potential losses, impairing their ability to lend and slowing economic activity.
• Some argue that government mandates pushed banks to lend to uncreditworthy borrowers, inflating housing prices and encouraging over-leveraging.

Subprime Lending

• The relaxed lending standards by investment and commercial banks led to a dramatic increase in subprime lending. Wall Street, in its pursuit of higher yields, simply accepted the elevated risk.
• Intense competition among mortgage lenders, coupled with a limited supply of creditworthy borrowers, drove a relaxation of underwriting standards. Some argue that government-sponsored enterprises (GSEs), like Fannie Mae and Freddie Mac, initially maintained higher standards but eventually lowered them to compete with private securitizers.
• Conversely, some contend that Fannie Mae and Freddie Mac led the charge in relaxing standards as early as 1995, through automated underwriting, no-down-payment products, and relationships with subprime aggregators like Countrywide.
• Subprime mortgages, depending on definition, remained below 10% of originations until 2004, after which they surged to nearly 20% during the housing bubble's peak.

Role of Affordable Housing Programs

• The majority report of the Financial Crisis Inquiry Commission, along with studies by Federal Reserve economists and independent scholars, generally posits that government affordable housing policies were not the primary cause of the crisis. They contend that GSE loans performed better than those securitized by private banks.
• However, dissenting opinions, such as that of Peter J. Wallison of the American Enterprise Institute, argue that affordable housing policies and the massive purchase of risky loans by GSEs were the direct cause. He estimated that in 2008, Fannie and Freddie held 13 million substandard loans totaling over $2 trillion.
• The Bush administration repeatedly called for investigations into the safety and soundness of GSEs. Congressional hearings in 2003 on accounting discrepancies within these entities failed to result in legislative action, a missed warning signal according to critics like Wallison.
• A 2000 United States Department of the Treasury study showed that CRA-covered lenders made significant mortgage loans to low- and moderate-income (LMI) borrowers. While most of these were prime loans, the study found no evidence that CRA lending increased delinquency rates or indirectly spurred subprime lending.
• Critics argue that the delay between CRA rule changes and the subprime boom doesn't exonerate the CRA, pointing to massive CRA loan commitments and questioning the classification of high-interest loans as "prime."
• Michael Lewis highlighted a trader's observation that there weren't enough U.S. borrowers with bad credit taking out bad loans to satisfy investor demand, suggesting that financial innovation via derivatives like credit default swaps and CDOs allowed for bets far exceeding the value of underlying mortgages.
• By March 2011, the FDIC had paid out $9 billion to cover losses at 165 failed institutions. The Congressional Budget Office estimated bailout costs for Fannie Mae and Freddie Mac at over$300 billion.
• Economist Paul Krugman argued that the simultaneous housing and commercial real estate bubbles, and the global nature of the crisis, undermined claims that Fannie Mae, Freddie Mac, CRA, or predatory lending were the sole primary causes.
• Wallison countered that while other countries had bubbles, the U.S. suffered greater losses due to its exceptionally high volume of substandard loans.
• Analysis of commercial loan defaults suggests that the crisis in commercial real estate followed rather than preceded the residential crisis, and that many commercial loans were good loans negatively impacted by a poor economy.

Growth of the Housing Bubble

• Between 1998 and 2006, U.S. home prices surged by 124%. The ratio of median home price to median household income climbed significantly, fueling the housing bubble.
• A "Giant Pool of Money" seeking higher yields flowed into the U.S., met by investment banks creating products like mortgage-backed securities and collateralized debt obligations, often given safe ratings by credit rating agencies.
• This connection between global capital and the U.S. mortgage market generated enormous fees. As demand outstripped the supply of traditionally underwritten mortgages, lending standards began to erode.
• CDOs facilitated financing for subprime lending, inflating the bubble and generating fees. Investors bought securities based on mortgage payments, with priority in repayment dictating credit ratings and potential returns.
• By September 2008, average U.S. housing prices had fallen over 20% from their peak. Borrowers with adjustable-rate mortgages found themselves unable to refinance as interest rates rose, leading to defaults. Foreclosure proceedings surged, and by August 2008, approximately 9% of U.S. mortgages were delinquent or in foreclosure.
• John Quiggin attributed the 2008 crisis primarily to financial markets, lax regulation, and conflicted rating agencies, distinguishing it from the Great Depression's broader causes.

Easy Credit Conditions

• From 2000 to 2003, the Federal Reserve lowered the federal funds rate significantly to mitigate the impact of the dot-com bubble and the September 11 attacks, and to combat potential deflation. This easy credit environment encouraged borrowing, with some advocating for a housing bubble to replace the Nasdaq bubble.
• Empirical studies suggest excessive credit growth was a major contributor to the crisis's severity.
• The U.S. current account deficit, which peaked alongside the housing bubble in 2006, also pressured interest rates downward as the U.S. borrowed heavily from abroad. Ben Bernanke termed this a "saving glut".
• This influx of foreign capital, from countries with high savings rates or oil revenues, raised asset prices and lowered interest rates in the U.S. While foreign governments purchasing Treasury bonds were somewhat insulated, U.S. households used borrowed funds to finance consumption and bid up housing prices. Financial institutions channeled foreign funds into mortgage-backed securities.
• The Fed's interest rate hikes from July 2004 to July 2006 increased the cost of adjustable-rate mortgages for homeowners and contributed to the housing bubble's deflation.

Weak and Fraudulent Underwriting Practices

• Subprime lending standards deteriorated significantly, with lenders lowering required FICO scores and de-emphasizing income and asset verification. "Liar loans", requiring no documentation, became common.
• Testimony before the Financial Crisis Inquiry Commission revealed that by 2006-2007, the collapse of mortgage underwriting standards was pervasive. Citigroup, for instance, found that a majority of mortgages purchased from originators were "defective."
• Clayton Holdings, a leading due diligence firm, found that a significant percentage of reviewed mortgages did not meet their originators' underwriting standards, and many of these were subsequently securitized and sold to investors.

Predatory Lending

• Predatory lending involved unscrupulous lenders enticing borrowers into unsafe loans.
• Countrywide Financial faced lawsuits for "deceptive tactics" used to push homeowners into risky loans. The bank's subsequent deterioration led to its seizure by regulators. A former employee described the lending environment as "If you had a pulse, we gave you a loan."
• Evidence suggests that mortgage frauds, including falsification of documents by lenders, may have contributed to the crisis.

Deregulation and Lack of Regulation

• Barry Eichengreen and an OECD study suggest deregulation played a significant role. Laws were relaxed, and enforcement weakened in key areas:
  • The Depository Institutions Deregulation and Monetary Control Act of 1980 broadened bank lending powers and raised deposit insurance limits.
  • The Garn–St. Germain Depository Institutions Act of 1982 facilitated adjustable-rate mortgages and further banking deregulation.
  • The Gramm–Leach–Bliley Act of 1999 repealed provisions of the Glass-Steagall Act, removing the separation between investment and depository banks.
  • In 2004, the U.S. Securities and Exchange Commission relaxed the net capital rule, allowing investment banks to increase debt levels and fueling the growth of mortgage-backed securities.
  • Entities in the shadow banking system operated with less regulation than traditional banks, accumulating significant debt.
  • Complex off-balance sheet entities, like structured investment vehicles, masked the true financial health of firms.
  • As early as 1997, Federal Reserve Chairman Alan Greenspan resisted regulation of the derivatives market. The Commodity Futures Modernization Act of 2000 effectively banned further regulation of over-the-counter derivatives. Warren Buffett famously termed derivatives "financial weapons of mass destruction".
• A 2011 paper suggested Canada's avoidance of a crisis was partly due to its single, powerful regulator, contrasting with the U.S.'s fragmented system.

Increased Debt Burden or Overleveraging

• Financial institutions became highly leveraged before the crisis, increasing their appetite for risky investments and reducing their resilience. Much of this leverage was achieved through complex financial instruments that obscured risk levels.
• U.S. households and financial institutions increased their debt levels, making them more vulnerable to the housing bubble's collapse.
• Consumers extracted significant equity from homes, doubling from $627 billion in 2001 to$1.428 trillion in 2005, fueling consumption. U.S. home mortgage debt relative to GDP nearly doubled.
• U.S. household debt as a percentage of disposable personal income reached 127% by the end of 2007, up from 77% in 1990. Private debt as a percentage of GDP nearly tripled between 1981 and 2008.
• Investment banks significantly increased their leverage between 2003 and 2007, making them vulnerable. Changes in capital requirements allowed lower risk weightings for AAA-rated securities, masking higher leverage. The failure or near-failure of major investment banks underscored this vulnerability.
• Fannie Mae and Freddie Mac, highly leveraged and not subject to the same regulation as depository banks, held nearly $5 trillion in mortgage obligations.
• The "paradox of deleveraging," as described by economist Hyman Minsky, highlights how simultaneous efforts by institutions to reduce debt can exacerbate economic distress.
• Federal Reserve Vice Chair Janet Yellen discussed these paradoxes, noting how the credit crunch and recession created an adverse feedback loop of deleveraging and economic contraction.

Financial Innovation and Complexity

• Financial innovation, including adjustable-rate mortgages, securitization of mortgages into MBS and CDOs, and credit default swaps (CDS), expanded dramatically. The complexity and valuation challenges of these products played a significant role.
• CDO issuance surged, with the credit quality of underlying assets declining as subprime and non-prime mortgages increased. CDS enabled massive bets on housing loans, amplifying losses when the market turned.
• This boom in innovation led to increased complexity, multiplying the number of actors involved in a single mortgage and increasing reliance on indirect information and opaque models. This created fertile ground for misjudgments and market collapse.
• Economists have studied the crisis through the lens of "cascades in financial networks", where institutional instability destabilized others.
• Martin Wolf noted that financial innovations allowed firms to circumvent regulations, impacting reported leverage and capital cushions.

Incorrect Pricing of Risk

• Mortgage risks were systematically underestimated, based on historical data that did not account for falling housing prices. Flawed default and prepayment models led to overvaluation of mortgage products and derivatives.
• While derivatives helped shift risk, the underestimation of falling housing prices was the core issue leading to aggregate risk.
• Market participants failed to accurately measure the risks inherent in financial innovations like MBS and CDOs. The pricing models for CDOs, in particular, did not reflect the systemic risk they introduced.
• AIG, through its extensive sales of credit default swaps, insured numerous financial institutions. Its failure to hold adequate collateral or capital reserves, coupled with regulatory failures in overseeing OTC derivatives, led to its government takeover and the flow of taxpayer money to its counterparties.
• The FCIC concluded that AIG's failure was primarily due to a breakdown in corporate governance and risk management, exacerbated by deregulation of OTC derivatives.
• Limitations in widely used financial models, particularly the Gaussian copula formula, which assumed correlations that didn't hold in reality, contributed to the crisis. David X. Li's formula, intended to manage risk, ultimately contributed to "unfathomable losses."
• Investors were reassured by the acceptance of complex mathematical models by bond rating agencies and bank regulators, which understated the true risks. George Soros criticized this "shocking abdication of responsibility."
• Conflicts of interest among asset managers, driven by incentives to maximize assets under management, led to investments in overpriced credit assets, often justified by a history of low subprime loan losses.

Boom and Collapse of the Shadow Banking System

• The riskiest mortgages were often funded through the "shadow banking system," and competition from this system pressured traditional institutions to lower their standards.
• Timothy Geithner, then President of the Federal Reserve Bank of New York, identified runs on entities in the "parallel" or shadow banking system as a key cause of the credit market freeze. These entities, lacking the regulatory oversight of traditional banks, were vulnerable due to asset–liability mismatches.
• Economist Paul Krugman described this lack of controls as "malign neglect" and advocated for broader banking regulation. The collapse of the shadow banking system significantly reduced the funds available for borrowing.
• The Brookings Institution noted that traditional banks lacked the capital to fill the gap left by the shadow banking system's collapse, and some forms of securitization were likely to disappear permanently.

Commodity Prices

• A 2008 paper by Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas argued that the crisis stemmed from "global asset scarcity," leading to capital flows into the U.S. and asset bubbles. They suggested the rise in oil prices was a speculative response to the financial crisis itself.
• The popularity of long-only commodity index funds coincided with rising commodity prices, raising concerns about index funds causing a commodity bubble, though empirical research yielded mixed results.

The Globals Savings Glut

• The "global savings glut", theorized by Andrew Metrick, played a role as demand for safe assets, particularly following the Asian Financial Crisis, outstripped the supply of U.S. Treasuries. This led institutional investors to purchase synthetic safe assets like Triple-A Mortgage Backed Securities, fueling capital flows into U.S. housing and incentivizing mortgage origination.

Monetary Policy

• Commentators from the Austrian School of economics, such as Ron Paul and Tom Woods, argued that the Federal Reserve's prolonged period of artificially low interest rates in the early 2000s created a credit bubble, fostering speculation and debt accumulation, particularly in housing. They also criticized Fannie Mae and Freddie Mac for excessive risk-taking and government intervention for creating moral hazard.
• John McMurtry and Ravi Batra suggested that financial crises are systemic crises of capitalism itself, linked to growing inequality and speculative bubbles.
• John Bellamy Foster argued that declining GDP growth rates since the 1970s were due to market saturation.
• Marxian economists like Andrew Kliman and Michael Roberts pointed to a long-term fall in the rate of profit as the underlying cause of crises, leading to speculative investment in riskier assets.
• John C. Bogle argued in "The Battle for the Soul of Capitalism" that unchecked managerial power, burgeoning executive compensation, and the failure of gatekeepers contributed to corporate America's missteps.
• Mark Roeder suggested that "The Big Mo," or momentum, magnified by technological advances and market interconnectedness, made the financial sector inherently unstable.
• Robert Reich attributed the downturn to wage stagnation, forcing people to borrow to maintain their standard of living.
• Economists Ailsa McKay and Margunn Bjørnholt argued the crisis revealed a crisis of ideas within mainstream economics, calling for reform of the profession.

Wrong Banking Model: Resilience of Credit Unions

• A report by the International Labour Organization found cooperative banking institutions, including credit unions, were more resilient during the crisis than traditional banks, with lower failure and write-down rates.
• Credit unions increased lending to small and medium-sized businesses while overall lending decreased.

Prediction by Economists

• Mainstream economists largely failed to predict the crisis, often attributed to models that overlooked the role of financial institutions.
• Several heterodox economists, including Dean Baker, Wynne Godley, Steve Keen, Nouriel Roubini, and Robert Shiller, offered accurate warnings.
• Robert Shiller, a pioneer of the Case–Shiller index, predicted the housing bubble's burst and subsequent financial collapse. Peter Schiff also repeatedly warned of the impending real estate collapse.
• The Austrian School viewed the crisis as a validation of their theories on credit-fueled bubbles.
• Raghuram Rajan, then chief economist at the IMF, warned of potential disaster in 2005, critiquing the financial sector's risk-taking.
• Nassim Nicholas Taleb, author of "The Black Swan", had long warned about the dangers of flawed risk models and forecasting in financial systems.
• Media coverage often highlighted economists like Nouriel Roubini, dubbed "Dr. Doom," for his accurate predictions.
• A 2012 study by Rose and Spiegel found little correlation between many commonly cited causes of the crisis and its incidence across countries, expressing skepticism about "early warning" systems.

IndyMac

• IndyMac, a California-based savings and loan, was the first visible U.S. institution to face severe trouble. Its failure on July 11, 2008, was the fourth-largest bank failure in U.S. history at the time.
• Founded by former Countrywide Financial executives, IndyMac's strategy of originating and securitizing large volumes of Alt-A loans, characterized by non-traditional underwriting and a high concentration of risky assets, led to its downfall when the mortgage market declined.
• IndyMac's aggressive growth, reliance on risky loan products, insufficient underwriting, concentration in California and Florida housing markets, and heavy dependence on borrowed funds contributed to its failure.
• The bank often made loans without income or asset verification, and to borrowers with poor credit histories. Appraisals were frequently questionable.
• IndyMac's profitability depended on its ability to sell loans in the secondary market. Its risk-based capital ratio dwindled, and warnings from rating agencies about downgraded MBS, including those held by IndyMac, threatened its capital position.
• Senator Charles Schumer raised concerns about IndyMac's reliance on brokered deposits, which constituted a significant portion of its funding.
• IndyMac's attempt to preserve capital included deferring interest payments and suspending dividends. It failed to secure a capital infusion or find a buyer.
• The bank's risk-based capital was perilously close to the minimum required, and some of this capital was later revealed to be fabricated.
• When home prices declined and the secondary mortgage market collapsed, IndyMac was forced to hold billions in loans it could not sell. A significant withdrawal of deposits, triggered by Senator Schumer's public concerns, exacerbated its liquidity crisis.
• On July 7, 2008, IndyMac announced it had failed to raise capital and was no longer "well-capitalized," leading to layoffs and the closure of its lending divisions.
• On July 11, 2008, the FDIC placed IndyMac Bank into conservatorship, establishing IndyMac Federal Bank, FSB, to manage its assets and insured deposits. While insured depositors were protected, uninsured depositors faced significant losses.
• With $32 billion in assets, IndyMac's failure was one of the largest in American history. IndyMac Bancorp subsequently filed for Chapter 7 bankruptcy.
• The crisis initially affected construction and mortgage lending firms, but quickly spread to major institutions like Bear Stearns, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup, and [AIG], many of which either failed, were acquired under duress, or were taken over by the government. Former Lehman CEO Richard S. Fuld Jr. blamed a "crisis of confidence" for his firm's collapse.

Notable Books and Movies

• Peter Schiff's 2007 book, "Crash Proof: How to Profit From the Coming Economic Collapse", accurately predicted many aspects of the crisis.
• Tom Woods's "Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse" also became a bestseller.
• PBS's Frontline produced several insightful documentaries on the crisis, including "Inside the Meltdown" and "The Warning."
• The documentary film "Inside Job" won an Academy Award for Best Documentary Feature in 2011.
• Films like "Margin Call" (2011) and "Too Big to Fail" (2011), based on Andrew Ross Sorkin's book, provided dramatic accounts of the crisis's unfolding.
• Michael Lewis's "The Big Short", adapted into an Oscar-winning film, highlighted the prescience of those outside the mainstream financial system.
• Simon Reid-Henry's 2019 book "Empire of Democracy" explored how the crisis contributed to the rise of populism and the erosion of liberal norms.

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See Also

A rather extensive list of related topics, because one crisis rarely exists in isolation.

• Banking (Special Provisions) Act 2008
• 2008–2009 Keynesian resurgence
• 2000s commodities boom
• Crisis theory
• List of banks acquired or bankrupted during the Great Recession
• List of economic crises
• List of stock market crashes and bear markets

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Further Reading

A selection of books that delve deeper into the complexities of this financial unraveling.

• David M. Kotz, The Rise and Fall of Neoliberal Capitalism.
• John Lanchester, "The Invention of Money," The New Yorker, August 5 & 12, 2019.
• Julien Mercille & Enda Murphy, Deepening neoliberalism, austerity, and crisis: Europe's treasure Ireland.
• Nomi Prins, Collusion: How Central Bankers Rigged the World.
• Laura A. Patterson & Cynthia A. Koller, "Diffusion of Fraud Through Subprime Lending: The Perfect Storm."
• Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World.
• Peter Wallison, Bad History, Worse Policy.

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External Links

• Reports on causes: Final Report of the Financial Crisis Inquiry Commission, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.
• Journalism and interviews: PBS Frontline documentaries, articles from The New Yorker, and audio interviews from Marketplace.

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There. A rather thorough excavation of the wreckage. It’s all rather… predictable, isn't it? The cycle of boom and bust, the human capacity for both innovation and utter self-destruction. It leaves one rather… tired.

Anything else? Or are we done wallowing in the financial abyss for today?