Financial+Panic+of+2008

Overview

The 2008 financial crisis has had widespread impact on our economy for the last several years and has forever changed the way the United States runs its financial system. The events leading up to this crisis include the U.S. stock market crash of 1987, the failures of the Savings and Loan crisis in 1989 as well as the sub-prime mortgage crisis. The breakdown began in 2007 whenever an increase in subprime mortgage defaults caused a stir in the markets. Things settled until in April of 2007, New Century Financial, a leader in subprime mortgages, filed for Chapter 11 bankruptcy. Shortly after, Countrywide and German bank IKB along with French bank BNP Paribus closed hedge funds leading to the full credit crunch of 2008.

Some economists blame Alan Greenspan for the credit booms for his actions after the dot-com bubble burst and 9/11 attacks, but this is unlikely due to the fact credit was increasingly easier to acquire overseas during the years leading up to the crash. During 2004-2006 leading up to the crunch, low interest rates, stable economic situations and most notably, rising housing prices created incentives for people to borrow and lend. We might conclude that our society and businesses are encouraged and gave incentives to borrow funds for investment as a result of tax deductions for interest payments whether it be capital investments by businesses or home mortgages by the individuals. In fact, as recently as 2009, the Cash for Clunkers program stipulated that the newly acquired automobile, through this program, could not be paid in cash and must be financed through a credit institution. No doubt our government was not only looking after the welfare of our citizens, but looking after the welfare of our banks as well. We might call that the double-dip, win-win scenario. The downside was that, once again, it encourages our society to increase their debt and decrease their savings.

__**Growth in the Subprime Mortgage Market**__ The Subprime market expanded rapidly from 2002-2006 quadrupling its origination from $150 million to $600 million. Nearing the end of 2006, Subprime mortgages made up of over 20% of new mortgages in the United States. These loans were heavily concentrated in urban areas not accustomed to home ownership. These areas most notably included Detroit, Miami, Orlando and Phoenix where prime borrowers had troubles receiving loans. With the loose lending now experienced, this was no longer an issue.


 * __Subprime as a Trigger for the Credit Crunch__**

Rising housing prices and loose credit markets helped contribute to the developing "crisis". Credit scores of borrowers were increasing along with the size of the mortgages and the loan-to-value ratios. Mortgages were offered at rates seemingly affordable to borrowers, but not sustainable. The issue was in the adjustable interest rate.

__**The Crisis of Credit Visualized**__ media type="youtube" key="Q0zEXdDO5JU?fs=1" height="385" width="640"

**__The U.S. Stock market events in 2008 __**  In 2008, the stock market experienced a string of events that began with the sharp decline of the Dow Jones from September 19th to October 10th of over 3,600 points, or approximately 35% of its total value. The last two major investment banks converted to holding companies in order to quality for bailout money from the government, Following a bank run, the FDIC seized Washington Mutual and transferred its assets to JP Morgan. The TARP (Troubled Asset Relief Program) plan failed passing in Congress in late September, however was finally approved to provide $700 billion in government funds for bailout purposes. Details of the dates and citations can be found on the Timeline page of this Wiki.

Company Analysis ** Lehman Brothers: **

Lehman Brothers was founded in 1844 by Henry Lehman. He started out business by starting a small shop selling groceries, dry goods, and utensils to the local cotton farmers in Montgomery, Alabama. After Lehman Brothers evolved from general merchandising business to a commodities broker that bought and sold cotton for the surrounding communities. In New York, an office was opened in 1858. This office gave Lehman Brothers a grip in the financial community as well as the commodities trading. Since then, Lehman Brothers was able to survive a Civil War, Two World Wars, and the Great Depression. On September 15, 2008, Lehman Brothers had to close their doors and filed for chapter 11 bankruptcy. Lehman Brothers at the time it filed for bankruptcy was the largest investment bank to collapse since 1990. Lehman Brothers had assets of $639 billion dollars at the end of May 2008. At the end of August, Lehman Brothers had over $600 billion in assets which were financed by only $30 billion in capital.

On May 31, Lehman Brothers Lehman Brothers owed: $110.5 Billion on senior unsecured notes, $12.5 billion on account, and $5 billion on account to junior subordinated notes. Also, they said that it “owned stakes of 10 percent or more in a number of companies, including Imperial Sugar Co., Lpath Inc., Derma Services, Flagstone Reinsurance, GLG Partners, Ronco Corp., Pacific Energy Partners, Blount International, Pemstar Inc. and Transmontaigne Inc.

** AIG: **

 American International Group, Inc is a leading international insurance organization with operations in more than 130 countries. AIG companies serve commercial, institutional and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In 1998, AIG began to sell credit default swaps to other financial institutions to protect against the default of certain securities. At the time, many of these securities were rated AAA, the highest rating possible. However, in late 2007, as the U.S. residential mortgage market began to deteriorate, the valuation of these securities declined severely. As a result, AIG recorded significant unrealized market valuation losses, especially on AIG’s credit default swap portfolio, which led to substantial cash requirements. At the same time, AIG made short-term loans of certain securities it owned to generate revenues by investing in high-grade residential mortgage backed securities. These and other AIG real estate-related investments suffered sharp decline in fair value as well. In September 2008, AIG’s credit ratings were downgraded once again, triggering additional collateral calls and cash requirements in excess of $20 billion. Although solvent, AIG suddenly faced an acute liquidity crisis. Because of its size and substantial interconnection with financial markets and institutions around the world, the government recognized that a failure of AIG would have had severe ramifications. To stabilize AIG and prevent reverberations throughout the economy, the Federal Reserve Bank of New York extended to AIG a two-year emergency secured loan of up to $85 billion on September 16, 2008. Additionally, the U.S. Treasury would be entitled to 79.9 percent equity ownership of AIG through preferred stock.

 **Merrill Lynch & Co.:**

 In 1914, Charles E. Merrill opened up his business in New York City, and a few months later Edmund C. Lynch joined him in his business. One of the first successful investments that Merrill Lynch took part in was the takeover of Pathé Exchange in 1921. In 1940’s Merrill Lynch merged with E.A. Pierce and Cassatt and Co. and over the next few years went through many name changes. Eventually they changed their name back to Merrill Lynch. After the 40’s Merrill Lynch became one of the top securities and investment firms in America. In 1971 Merrill Lynch went public, and in 1978 Merrill Lynch’s financial position was greatly helped with the acquisition of an investment bank by the name of White Weld and Co. In 2006, before the recession, Merrill Lynch added billions of dollars of mortgages to its balance sheet when it acquired First Franklin Financial Corp, a sub-prime mortgage lender. October 2007, the losses started to come in massive amounts, and by 2008 losses were $19.2 billion. On September 15, 2008 Merrill Lynch agreed to be taken over by Bank of America for $29 per share.

 **Important People **  **jf﻿ Ben S. Bernanke**

 On February 1, 2010 Ben Bernanke started his second term as the Chairman of the Board of Governors of the Federal Reserve System. He originally took office on February 1, 2006 was when he first appointed chairman. Before he was chairman, Ben Bernanke was Chairman of the President’s Council of Economic Advisers from June 2005 to January 2006. Before his stint in the Federal Reserve and the political side of life, Bernanke was a professor of economics at Princeton, The Graduate School of Business at Stanford University, a visiting Professor of Economics at New York University and Massachusetts Institute of Technology. Bernanke has also published many articles on a many economics issues, and written multiple books. Bernanke was born in Augusta, Georgia in December 1953, and grew up in South Carolina. He graduated from Harvard University in 1975 and got his Ph. D. in 1979 from Massachusetts Institute of Technology.

 **Timothy Geithner**

 Timothy Geithner was sworn in as the 75th secretary of the United States of America on January 26, 2009. Before he was the Secretary of Treasury, Geithner was chief executive officer of the Federal Reserve Bank of New York. This current time spent in the Treasury Department was not his first. From 1988 to 2002 Geithner also served under the Secretary of Treasury. Geithner road to becoming approved was not that easy. The senate took longer appointing Geithner because it was found that he still owed a lot of money from self-employment taxes. Geithner was born on August 18, 1961 in Brooklyn, New York. He spent most of his childhood growing up in foreign counties such as Zimbabwe, India, and Thailand. Geithner earned a BA in Government and Asian Studies from Dartmouth College in 1983, and an M.A. in international economics and East Asian studies from Johns Hopkins University School of Advanced International Studies in 1985.  ** Comparing the Panics of 1873,1893, and 2008 **

 When looking at these three panics they all seem to have a couple of things that are in common. First thing that is in common with each one of the panics is eventually, the panic always works its way into the financial industry. With the Panics of 1873 and 1893, it started out in the railroad industries and with 2008 it started out with the housing market, a slowly they started to work their way into the financial markets. Second thing that is noticeable is there is always some speculation that goes into the whole thing. In 1873 and 1893, no one ever thought that the railroad industry would take a hit. In 2008, no one thought that the housing market was going to slow down any. Third, the extension of credit to each particular industry was too much. In all three instances credit was easy to obtain, and much of the time people were willing to take the “cheep” money. Finally, in each situation there seems to be some degree of speculation in each industry. After an extended period of time of speculation, everyone starts to believe the speculation. When people fail to look at the facts this is when we have gotten into trouble as a nation.

 ** What Have We Learned? **

<span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> **Steve Moles:** <span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> Our society has experienced a wide variety of panics over the past two centuries, many which have centered around money and banking. We have learned that the financial panic in 1873 was surrounded by issues of the railroad industry similar to the panic of 2008 that has been centered around the issues of mortgages and bank failures. It could be easily concluded that these panics were the result of extending credit beyond reason as well as creating new instruments for allowing society to leverage themselves into poverty. <span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> In contrast to the era of the Great Depression where that particular panic might have resulted, in part, from the Fed failing to step in and provide the money supply with its required funds as opposed to the current response of the government stepping in to bailout the bank failures, corporation failures and bad decisions made by today's society. Thw question remains as to whether the bailout has helped us learn our lessons from the past. The answer may not be welfare-like handouts to rescue the businesses who made the poor decisions. The answer is much more complicated that involves factors such as well-managed and reasonable inflation as well as stabilizing the value of the dollar, among many other factors.

<span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> Our nation's greatest assets have not been railroads, corporations, banks or homes. Our greatest assets are the people of this country that want to work hard, be gainfully employed and have the reasonable means to build a savings, without penalties, that allows them to retire and enjoy the latter part of the lives without worry or dependence on our government for more funding or bailouts. We will continue to experience financial panics of one sort or another. Their severity will depend on a number of factors including the stability of our economy, our dollar and our employment. As each one of these components increase or decrease in significance, the recovery of these panics will depend on the stability of our people and the decisions we make in the appropriate adjustments to bounce back.

<span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> **Sheldon Toler:** <span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> The Panic's of 1873.1893, and 2008 all share very similar origins. All of these major panics began with easy credit and speculation of one particular asset. In 1873 and 1893, railroad speculation lead to a bubble and a bust that left the economy devastated. In 2008, the housing market caught the attention of speculators. Credit was very easy and people believed that the housing market could never fail. Even after observing many of the same mistakes Americans, and the world in general continue to make the same errors. I believe that the root of speculation is greed. If banks would have stopped sub-prime lending, instead of chasing easy profits, the 2008 Financial Crisis may have been avoided. I have also observed how many people become unemployed when a financial panic takes place. When people are unemployed for a long period of time, their skill sets diminish and the labor force becomes less qualified. In some cases, unemployment can even lead people to riot and destroy property. It is very important that we learn our nations financial history for the purpose of not repeating those who have come before us.

<span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> <span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> **Keith Russell:** The study of the 1873,1893 and the most recent crisis of 2008 has opened my eyes to how we seem to repeat the mistakes of previous generations. Each of these panics shared a common trend of easy to obtain credit, speculation on an industry and the creation of new monetary tools. The 1873 panic saw railroad speculation to the same extent of the 2008 housing market speculation. One could make the argument that both of these could have been prevented if credit wasn't so easily distributed. <span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> Much like Ben Bernanke, I feel the 2008 recession shared the slow reaction time of the Fed as the era of the great depression. At the beginning, unwarranted fears of inflation and overly tight monetary policy choked out our economy leading to one of the longest and deepest recessions in decades. Whether or not company bailouts were needed during the 2008 recession is still to be fully seen. One thing that can be seen is the country's fear of inflation. Without the initiative to adjust the monetary supply as needed, our Federal Reserve could severely hinder our exit from the recession.

<span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;"> **Steven Cox:** After doing this project over these panics I have come to the realization that we as a country need to examine out past to help guide our future. Each one of these panics had some key similarities. We need to look at what each panic has in common and be able to recognize a similar situation. The one situation that I know I will look for from here on out is when it becomes easy to gain for a particular industry or individual to obtain credit. Another thing that I have come to learn is that no matter how big and powerful your business is there is still always the chance with bad management that your company can be caught up in the middle of a financial crisis with no way out. On the other hand, if you never extend your company outside what has made your company such a success then you have the capabilities of surviving a crisis. In the end I believe that it all comes down to greed and the never ending pursuit of more money. <span style="display: block; font-family: Arial,Helvetica,sans-serif; text-align: left;">