01January 2008: Fed Tries to Stop Housing Bust
In response to a struggling housing market, the FOMC lowered the Fed funds rate, to 3.5% on January 22, 2008, then to 3.0% a week later (January 30). Economic analysts thought that lowering interest rates would save the housing bust. A 30-year conventional loan was at 5.76% compared to 6.22% the year before.
It wasn't enough to millions of homeowners who had adjustable-rate mortgages that had just reset. They were facing much higher monthly payments.They couldn't sell their homes because home prices were falling.
January's existing home sales rate fell to its lowest level in 10 years. The 4.9 million rate was down 23% year-over-year. It had begun slowing in September 2007. Many analysts thought that signaled a bottom. (National Association of Realtors, Soft But Stabilizing Home Sales, February 25, 2008)
Similarly, January saw 57% more foreclosures than the year before. That was better than December's 97% increase year-over-year. (Source: Realtor.org, Foreclosure Rate Climbs More Slowly, February 26, 2008)
02February: Bush Signs Tax Rebate as Home Sales Inch Upward
President Bush signed a tax rebate plan to help the struggling housing market. That increased limits for FHA loans and allowed Freddie Mac to repurchase jumbo loans. (Source: FoxBusiness, Existing-Home Sales Slip in January, February 25, 2008)
February's homes sales rose 2.9%, to 5.03 million. But that was 24% lower than the prior year. The median resale home price was $195,000, down 8.2% year-over-year. Foreclosures were up 60% year-over-year, about the same as January's 57% foreclosure increase.(National Association of Realtors, Existing Home Sales Rise in February, March 24, 2008. RealtyTrac.com, Foreclosure Activity Decreases 4% in February, March 13, 2008)
03March: Fed Begins Bailouts
On March 7, the Fed announced its Term Auction Facility program would release $50 billion each on March 10 and March 24. That provides 28-day loans to banks who may not want other banks to know they need to use the Fed's discount window. This didn't want other banks to know they held a lot of subprime mortgage debt on their books. (Source: Federal Reserve Press Release, March 28, 2008)
Federal Reserve Chairman Ben Bernanke realized the Fed needed to take swift and aggressive action to prevent a more serious recession. Falling oil prices meant the Fed was not concerned about inflation. The Fed's used expansionary monetary policy The Fed's goal is to lower LIBOR and keep adjustable-rate mortgages affordable. In its role of "bank of last resort," it became the only bank willing to lend.
The Board also initiated a series of term repurchase transactions, expected to cumulate to $100 billion, conducted as 28-day term repurchase agreements with primary dealers.
On March 11, the Fed announced it would lend $200 billion in Treasury notes to bail out bond dealers. They were stuck with mortgage-backed securities and other collateralized debt obligations that they couldn't resell on the secondary market. The secondary market for these debt products dried up as a result of the Subprime Mortgage Crisis.
No one knew who had the bad debt, and how much was out there. All buyers of debt instruments became afraid to buy and sell from each other. No one wanted to get caught with bad debt on their books. The Fed was trying to keep liquidity in the financial markets.
But the problem was not just one of liquidity, but also of solvency. Banks were playing a huge game of musical chairs, hoping that no one gets caught with more bad debt. The Fed tried to buy time by temporarily taking on the bad debt itself. It protected itself by only holding the debt for 28 days, and only accepting AAA rated debt (Source: Financial Times, Fed fights on with $200 billion facility, December 12, 2007. "Timeline," Federal Reserve Banks of St. Louis.)
On March 17, the Federal Reserve held its first emergency weekend meeting in 30 years. It agreed to guarantee Bear Stearns' bad loans so that JP Morgan would purchase it and prevent bankruptcy. Bear Stearns' had on its books about $10 trillion in securities. If it had gone under, they would have become worthless and jeopardized the global financial system.
On March 19, the FOMC lowered the fed funds rate by 0.75 percent to 2.25 percent. It had dramatically halved the interest rate in six months. That put downward pressure on the dollar which increased oil prices.
That same day, Federal regulators agreed to let Fannie Mae and Freddie Mac take on another $200 billion in subprime mortgage debt. The two government-sponsored enterprises (GSE) would buy mortgages from banks, a process that is known as buying on the secondary market. They then package these into mortgage-backed securities and resell them to investors on Wall Street. All will go well if the mortgages are good, but if they turn south, then the two GSE's would be liable for the debt. (Source: Washington Post, More Cash for Mortgages, March 21, 2008)
At the same time, the Federal Housing Finance Board authorized the regional Federal Home Loan Banks to take an extra $100 billion in subprime mortgage debt. The loans must be guaranteed by Fannie and Freddie Mac. (Source: Washington Post, More Cash for Mortgages, March 21, 2008)
Paulson and Bernanke thought this would take care of the problem. They severely underestimated how extensive the problem was. The action further destabilized the two mortgage giants.
04April - June: Fed Lowers Rate and Buys More Toxic Bank Debt
On April 30, the FOMC lowered the Fed funds rate to 2%.
On April 7 and on April 21, the Fed added another $50 billion each through its Term Auction Facility.
On May 20, the Fed auctioned another $150 billion through the Term Auction Facility.
By June 2, the Fed auctions totaled $1.2 trillion. In June, the Federal Reserve lent $225 billion to provide liquidity through its Term Auction Facility. What was supposed to be a temporary stop-gap measure had become a permanent fixture.
05July 12, 2008: IndyMac Bank Fails
Angry Indymac Bank depositors were warned by Los Angeles police to remain calm while they wait in line to withdraw funds from the failed bank. About 100 people were concerned they will lose their deposit since the Federal Deposit Insurance Corporation (FDIC) only insured amounts up to $100,000. That includes 100% of your savings, checking and money market deposits and certificates of deposit (CDs) up to $100,000 per FDIC-approved bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank. So, as long as you are within their guidelines, your money is safe in a bank.
If you have more than $100,000 at any bank, you should move the excess to another bank. Also, many banks sell investment products such as stocks, bonds, and mutual funds. Like any other investment firm, these are not insured and states it clearly on your prospectus.
On July 23, U.S. Treasury Secretary Henry Paulson made the Sunday talk show rounds to explain the need for a bail-out of Fannie Mae and Freddie Mac. The two government-sponsored enterprises (GSE) buy mortgages from banks, a process known as buying on the secondary market. They then package these into mortgage-backed securities and resell them to investors on Wall Street.
On July 23, Congress approved a bill that allowed the Treasury Department to guarantee as much as $25 billion in loans held by Fannie Mae and Freddie Mac. It also allowed $300 billion in FHA loan guarantees, $15 billion in housing tax break, and $3.9 billion in housing grants.
The two agencies themselves hold or guarantee more than $5 trillion, or half, of the nation's mortgages. Wall Street's fears that these loans will default have caused Fannie's and Freddie's shares to tumble, making it more difficult for the private companies to raise additional capital themselves. (Source: AP, Paulson braces public for months of tough times, July 21, 2008. AFP, US Treasury rescue of Freddie, Fannie at $25 Billion, July 22, 2008)
Paulson reassured talk show listeners that the banking system is solid, even though other banks might fail like IndyMac. However, the FDIC system is designed to guarantee deposits up to $100,000 per bank per individual. This was later revised upward to $250,000.
06September 15, 2008: Lehman Brothers Bankruptcy Triggered Global Panic
U.S. Treasury Secretary Henry Paulson said no to further Wall Street bailouts. As a result, Lehman Brothers investment bank filed for bankruptcy, Merrill Lynch sold itself to Bank of America, and AIG turned to the Federal Reserve for emergency funding.
Paulson said no to government protection for some of Lehman's $60 billion in uncertain mortgage assets in a weekend negotiation with potential buyers Barclay's and Bank of America. The two suitors walked out of government-sponsored talks yesterday.
Paulson was unwilling to let the government take on all risk in the financial markets, thereby letting banks off the hook for making bad decisions during the Subprime Mortgage Crisis. Paulson felt that the government bailout of Bear Stearns and Fannie Mae and Freddie Mac was enough. (Source: The Economist, Nightmare on Wall Street, September 15, 2008)
At the time, he thought Lehman's bankruptcy wouldn't trigger a global disruption because it wasn't large enough. However, the panic that resulted proved that an unregulated industry, like investment banking, could not function without government intervention.
As a result, U.S. Treasury bond yields fell further as investors fled to the relative safety of these Government-backed investments. (Bond yields fall when demand for the underlying bond rises, since the government can afford to pay less in interest on products that are in high demand.) Although fixed mortgage rates usually closely follow that of Treasury Bond yields, fear of further bad mortgages kept these rates high. That weakened the housing market.
07September 16, 2008: Fed Buys AIG for $85 Billion
The Federal Reserve took over AIG for $85 billion. The company had insured trillions of dollars of mortgages throughout the world. If it had fallen, so would the global banking system. Bernanke said that this bailout made him angrier than anything else. That's because AIG took risks with cash from supposedly ultra-safe insurance policies. It used it to boost profits by offering unregulated credit default swaps.
In October, the Federal Reserve took on another $52.5 billion in mortgage-backed securities. The Treasury Department purchased an additional $40 billion in preferred shares as part of its Capital Repurchase Plan.The funds allowed AIG to retire many swaps, freeing it up to lend more.
Investors fled money-market mutual funds. That meant that banks and other businesses couldn't get the money they needed to fund their day-to-day business. If it had lasted another few weeks, shippers would have had no cash to keep the trucks running that deliver food to grocery stores. We were that close to a complete collapse.
09September 18, 2008: Paulson and Bernanke Submit Bailout to Congress
Paulson and Bernanke asked Congress to approve a $700 billion bailout to buy up mortgage-backed securities that were in danger of defaulting. By doing so, Paulson wanted to take these debts off the books of banks, hedge funds and pension funds that held them.
When asked what would happen if Congress didn't approve the bailout, Paulson replied, "If it doesn't pass, then heaven help us all."
Bernanke announced the Fed would lend the money needed by banks and businesses to operate so they wouldn't have to pull out the cash in money market funds. This, along with the announcement of the bailout package, calmed the markets enough keep the economy functioning. Unfortunately, the Fed didn't have time to come up with a snazzy name, so the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility was born. The Fed created many other innovative but poorly named, tools throughout the crisis.
On September 23, Congressman Barney Frank, Chairman of the Housing Financial Service Committee, worked with lawmakers to negotiate a plan that cost less and offered more protection for taxpayers. These measures made it into the final bailout bill.
12September 26, 2008: WaMu Goes Bankrupt
Washington Mutual Bank went bankrupt went bankrupt when its panicked depositors withdrew $16.7 billion in 10 days. It had insufficient capital to run its business. It taken over by the FDIC and sold to J.P. Morgan for $1.9 billion. It after
13September 29, 2008: Stock Market Crashes as Bailout Rejected
The stock market collapsed when the U.S. House of Representatives rejected the bailout bill. Opponents were rightly concerned that their constituents saw the bill as bailing out Wall Street at the expense of taxpayers. But they didn't realize that the future of the global economy was at stake.
Stock investors did, sending the Dow Jones Industrial Average down 770 points, the most in any single day in history. It didn't stop there. Global markets panicked:
- The MSCI World Index dropped 6% in one day, the most since its creation in 1970.
- Brazil's Bovespa was halted after dropping 10%.
- The London FTSE dropped 15%.
- Gold soared to over $900 an ounce.
- Oil dropped to $95 a barrel.
To restore financial stability, the Federal Reserve doubled its currency swaps with foreign central banks in Europe, England, and Japan to $620 billion. The governments of the world were forced to provide all the liquidity for frozen credit markets.
14October 3, 2008: Congress Passes $700 Billion Bailout Bill
The bank bailout bill was supposed to give troubled banks the right to submit a bid price to sell their assets to TARP as part of a reverse auction. However, it would have taken too long to implement. Instead, Treasury bought shares of troubled banks to inject capital into the frozen financial system.
15October 6: Global Stock Markets Collapse Despite Central Bank Action
Stock markets around the world plummeted, despite the approval of the bailout package. Central bank actions are just a stop-gap measure keep financial markets operating until private banks trust each other again. Instead, the banks are afraid they'll get stuck with the toxic debt, loaded with subprime and defaulting mortgages. It's just like a game of musical chairs. The only solution the central banks have is to keep the music playing by flooding global markets with credit. The crisis didn't cause another depression because central banks around the world did what they were supposed to do -- restore liquidity. They provided the overnight lending capability that private banks usually provide to each other.
16October 7, 2008 - $1.7 Trillion Commercial Loan Program
The Federal Reserve agreed to directly issue short-term loans for businesses that can't get them elsewhere. Interest rates will be from 2-4%, high under normal times but low compared to LIBOR rates at that time. The Fed bought high-quality, three-month debt FRP, dozens of companies that signed up. They included Morgan Stanley, the finance arm of General Electric, Ford Motor Credit, and GMAC LLC.
The Fed announced the program to allow businesses to keep enough cash flow to stay in business. Commercial paper is the source of funds businesses need to meet payroll and pay day-to-day bills. Since the beginning of September, the amount of U.S. commercial paper has declined by about $350 billion, or 20%, to $1.45 trillion. (Source: WSJ.com, IOU, Uncle Sam: Loans Start Today, October 27, 2008)
The Fed's loan programs mean that fewer businesses will go bankrupt due to cash flow problems, which was Washington Mutual's problem. It should also help to lower interest rates, thanks to increased liquidity.
17October 8 and 14, 2008: Central Banks Coordinate Global Action
On October 8, the Federal Reserve and the central banks of the EU, Canada, UK, Sweden and Switzerland cut their rates by half a point. China's central bank cut its rate by .27 of a point. This was done to lower LIBOR, thus lowering the cost of bank borrowing. Overnight bank lending rates dropped in response, indicating a potential turning point in the crisis. (Source: Guardian, "Global rate cuts helps ease overnight interbank rates," October 8, 2008)
On October 14, the governments of Europe, Japan, and the United States again took unprecedented coordinated action to stem the ongoing global credit crisis. The European Union committed to spending $1.8 trillion to guarantee bank financing, buy shares to prevent banks from failing, and take any other steps needed to get banks to lend to each other again. This step was taken after the UK committed $88 billion to purchase shares in failing banks and $438 billion to guarantee loans. In a show of solidarity, the Bank of Japan agreed to lend unlimited dollars and suspend its bank stock selling program. In return, the EU is asking the U.S. to meet and increase banking regulation and increase the role of the IMF in this process. (Source: Bloomberg, "BOJ Offers Unlimited Dollars to Banks," October 14, 2008; Bloomberg, "Europe Push for Global Banking Rules," October 14, 2008)
In response to the global united front, Paulson changed how he would use TARP funds. Instead of purchasing toxic mortgage debt, he agreed to purchase equity ownership in major banks.
18October 21, 2008 - Fed Lends $540 Billion to Bail Out Money Market Funds
The Federal Reserve lent $540 billion to allow money market funds to have enough cash to meet a continuing barrage of redemptions. Since August, over $500 billion was withdrawn from money markets, which is where most businesses park their overnight cash. Businesses hoarded cash because LIBOR rates skyrocketed as banks panicked and stopped lending to each other.
The Fed's Money Market Investor Funding Facility (MMIFF) will be managed by JPMorgan Chase. The MMIFF will purchase up to $600 billion of certificates of deposit, bank notes and commercial paper that comes due within the next 90 days. The remaining $60 billion will come from the money markets themselves, who must purchase commercial paper from the MMIFF.
On September 19, the Fed had established the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. There was $122.8 billion of such loans outstanding as of Oct. 15. On September 21, the Treasury guaranteed $50 billion worth of money market funds. The fact that the Fed has announced this new purchase program shows that credit markets are still partially frozen. (Source: Federal Reserve, Press Release, October 21,2008. Bloomberg, Fed to provide $540 billion to aid money funds, October 21, 2008)
One October 29, 2008, one week later, the Fed lowered the Fed funds rate to 1%.
The Treasury partnered with the Federal Reserve to use part of the $700 billion bailouts to address a freeze in the consumer credit market. The $1 trillion secondary market for a credit card, auto and student debt had come to a standstill. That's because that debt had been sold as asset-backed securities, and investors were just as afraid to buy them as they were the subprime mortgage-backed securities. The TALF program kept these credit card companies afloat by buying their old debt, suffusing them with enough capital to avoid bankruptcy.
On November 21, the FDIC agreed to guarantee up to $1.3 trillion in loans that banks made to one another. About 1.2 million unemployed workers received an extra three months of benefits. GM, Ford, and Chrysler, on the other hand, were denied their request for $50 billion in bailout funds.
On November 25, The U.S. Treasury gave Citigroup a $20 billion cash infusion in return for $27 billion of preferred shares yielding 8% annual return, and warrants to buy no more than 5% of Citi's common shares at $10 per share.
On November 26, the Fed announced it planned to spend $800 billion to purchase mortgage-backed securities from Fannie Mae and Freddie Mac, as well as consumer loans. As a result, rates for 30-year fixed mortgages fell to 5.5% from 6.38%. (Source: Barron's, The Fed Tries to Top TARP, November 26, 2008)
The Fed successfully revived commercial bank lending with the Commercial Paper Facility , although activity has stabilized. Mortgage applications should start to rise, as well, since Fannie and Freddie will have unloaded some of their debt and will be free to make new loans. However, the questions remain as to how much demand is there for mortgages.
Many of the programs the Fed has announced, such as the Commercial Lending Program and a program to buy toxic credit card debt were just starting to be implemented, and so have not yet had a chance to take effect.
On December 16, the FOMC dramatically lowered the Fed funds rate to "between 1/4 points and zero," the lowest rate in its history. It lowered the discount rate to .5%. With that, the Fed couldn't lower rates any further. It used its other tools and created a few new ones. (Source: FOMC statement, October 29, 2008)
On December 19, Treasury inserted $105 billion in TARP funds into eight banks in return for preferred stock. The government would receive a 5% dividend, increasing to a painful 9% over time. Most banks bought the government out as soon as the crisis was over. Taxpayers actually made a profit on the deal.
GM, Chrysler, and Ford asked for a $34 billion bailout. In January 2009, they got $24.9 billion. GM and Chrysler needed it, but Ford really didn't. However, without the bailout, nearly 3 million jobs could have been lost.
McCain's proposal was very similar to the government's bill, while Obama took a more long-term approach.
22More Crises Timelines
2008 Financial Crisis Timeline
The 33 Most Critical Events in the Worst Crisis Since the Depression
The 2008 financial crisis devastated Wall Street, Main Street, and the banking industry. The Federal Reserve and the Bush administration spent hundreds of billions of dollars to add liquidity to the financial markets to avoid a complete collapse. They barely succeeded.