01January 2008: Fed Tries to Stop Housing Bust
In response to a struggling housing market, the Federal Market Open Committee began lowering the fed funds rate. It dropped the rate to 3.5 percent on January 22, 2008, then to 3.0 percent a week later. Economic analysts thought lower rates would be enough to restore demand for homes. For example, the interest rate on a 30-year conventional loan was reduced to 5.76 percent from 6.22 percent in 2007.
It didn’t help the millions of homeowners who had adjustable-rate mortgages. They took introductory interest rates, knowing they would reset after a few years. Many planned to sell their homes before then. When home prices fell in 2006, they couldn't sell. They couldn't afford the higher monthly payments from the interest rate reset. As a result, they were facing foreclosure.
January's existing home sales rate fell to its lowest level in 10 years. The 4.9 million rate was down 23.4 percent, according to the National Association of Realtors. Home prices fell to $201,100, down 4.6 percent from the prior year. Housing inventory was 4.19 million, a 10.3 month supply.
02February: Bush Signs Tax Rebate as Home Sales Continue to Plummet
February's homes sales fell 24 percent year-over-year. It reached 5.03 million according the National Association of Realtors. The median resale home price was $195,900, down 8.2 percent year-over-year.
Foreclosures were up 60 percent year-over-year. It was about the same as January's 57 percent foreclosure increase.
03March: Fed Begins Bailouts
On March 7, the Fed announced that its Term Auction Facility program would release $50 billion on March 10 and again on March 24. That provided 28-day loans to banks who didn’t want other banks to know they needed to use the Fed's discount window. They didn't want other banks to know they held a lot of subprime mortgage debt on their books.
The Fed Chair realized the Fed needed to take aggressive action. It had to prevent a more serious recession. Falling oil prices meant the Fed was not concerned about inflation. When inflation isn’t a concern, the Fed can use expansionary monetary policy. The Fed's goal was 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. These were 28-day term repurchase agreements with primary dealers. The Fed’s goal was to pump $100 billion into the economy.
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. They couldn't resell them on the secondary market. The subprime mortgage crisis dried up the secondary market for these debt products.
No one knew who had the bad debt or 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 would get 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.
Beginning March 14, the Federal Reserve held its first emergency weekend meeting in 30 years. On March 17, it announced it would guarantee Bear Stearns' bad loans. It wanted JP Morgan to purchase Bear and prevent bankruptcy. Bear Stearns' had about $10 trillion in securities on its books. If it had gone under, these securities would have become worthless. That would have jeopardized the global financial system.
On March 18, the Federal Open Market Committee lowered the fed funds rate by 0.75 percent to 2.25 percent. It had 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 would buy mortgages from banks. This process is known as buying on the secondary market. They then package these into mortgage-backed securities and resell them on Wall Street. All goes well if the mortgages are good, but if they turn south, then the two GSEs would be liable for the debt.
The Federal Housing Finance Board also took action. It authorized the regional Federal Home Loan Banks to take an extra $100 billion in subprime mortgage debt. The loans had to be guaranteed by Fannie and Freddie Mac.
Fed Chair Ben Bernanke and U.S. Treasury Secretary Hank Paulson thought this would take care of the problem. They underestimated how extensive the crisis had become. These bailouts only 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 percent.
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 through its Term Auction Facility. This temporary stop-gap measure of adding liquidity had become a permanent fixture.
05July 11, 2008: IndyMac Bank Fails
On July 11, the Office of Thrift Supervision closed IndyMac Bank. Los Angeles police warned angry IndyMac depositors to remain calm while they waited in line to withdraw funds from the failed bank. About 100 people worried they would lose their deposit. The Federal Deposit Insurance Corporation only insured amounts up to $100,000.
On July 23, Secretary Paulson made the Sunday talk show rounds. He explained the need for a bailout of Fannie Mae and Freddie Mac. The two agencies themselves held or guaranteed more than half of the $12 trillion of the nation's mortgages. Wall Street's fears that these loans would default caused Fannie's and Freddie's shares to tumble. This made it more difficult for the private companies to raise capital themselves.
Paulson reassured talk show listeners that the banking system was solid, even though other banks might fail like IndyMac.The problem was that the FDIC system only guaranteed deposits up to $100,000 per bank per individual. This was later raised to $250,000.
On July 30, Congress passed the Housing and Economic Recovery Act. It gave the Treasury Department authority to guarantee as much as $25 billion in loans held by Fannie Mae and Freddie Mac. It created a new regulator for Fannie and Freddie called the Federal Housing Finance Agency. It also allowed $300 billion in FHA loan guarantees, $15 billion in housing tax breaks, and $3.9 billion in housing grants.
06September 7: Treasury Nationalizes Fannie and Freddie
The FHFA placed Fannie and Freddie under conservatorship. It allowed the government to run the two until they were strong enough to return to independent management.
The FHFA allowed Treasury to purchase preferred stock of the two to keep them afloat. They could also borrow from the Treasury. Last but not least, Treasury was allowed to purchase their mortgage-backed securities.
The Fannie and Freddie bailout initially cost taxpayers $187 billion. But over time, they two paid back all costs plus added $58 billion in profit to the general fund.
07September 15, 2008: Lehman Brothers Bankruptcy Triggered Global Panic
Paulson and Bernanke sponsored a weekend negotiation with the nation's top bankers to salvage investment bank Lehman Brothers. Potential buyers Barclay’s and Bank of America were interested only if the government protected them for some of Lehman's $60 billion in uncertain mortgage assets. When Paulson said no, the two suitors walked out of the government-sponsored talks.
Paulson was unwilling to let the government take on all the risk in the financial markets. He didn’t want to let banks off the hook for making bad decisions during the subprime mortgage crisis. Paulson felt that the bailouts of Bear Stearns, Fannie, and Freddie was enough.
At the time, he thought Lehman's bankruptcy wouldn't trigger a global disruption because it wasn't large enough. But the panic that resulted proved that an unregulated industry, like investment banking, could not function without government intervention.
Later that day, Bank of America officially announced it would purchase struggling Merrill Lynch for $50 billion.
08September 16, 2008: Fed Buys AIG for $85 Billion
The American International Group Inc. turned to the Federal Reserve for emergency funding. 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. AIG took risks with cash from supposedly ultra-safe insurance policies. It used it to boost profits by offering unregulated credit default swaps.
On October 8, 2008, the Federal lent another $37.8 billion to AIG subsidiaries in exchange for fixed-income securities.
On November 10, 2008, the Fed restructured its aid package. It reduced its $85 billion loan to $60 billion. The $37.8 billion loan was repaid and terminated. The Treasury Department purchased $40 billion in AIG preferred shares. The funds allowed AIG to retire its credit default swaps rationally, stave off bankruptcy, and protect the government's original investment.
09September 17, 2008: Economy Almost Collapsed
Due to losses from Lehman’s bankruptcy, investors fled money market mutual funds. That's where companies keep their cash. On Tuesday, September 16, the Reserve Primary Fund "broke the buck." It didn't have enough cash on hand to pay out all the redemptions that were occurring.
On September 17, the attack spread. Investors withdrew a record $144.5 billion from their money market accounts. During a typical week, only about $7 billion is withdrawn.
If it had continued, businesses couldn't get money to fund their day-to-day operations. In just a few weeks, shippers wouldn’t have had the cash to deliver food to grocery stores. We were that close to a complete collapse.
10September 18, 2008: Paulson and Bernanke Meet with Congress
On September 18, Paulson and Bernanke met with Congressional leaders to explain the crisis. Republicans and Democrats alike were stunned by the somber warnings. They realized that credit markets were only a few days away from a meltdown.
The leaders were prepared to work together in a bipartisan fashion to craft a solution. But many rank-and-file members of Congress were not on board.
11September 19, 2008 - Fed Insures Money Market Accounts
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. 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.
12September 20, 2008: Treasury Submits Legislation to Congress
On September 20, Paulson submitted a three-page document that asked Congress to approve a $700 billion bailout. Treasury would use the funds 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."
Goldman Sachs and Morgan Stanley, two of the most successful investment banks on Wall Street, applied to become regular commercial banks. They wanted the Fed's protection.
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.
14September 26, 2008: WaMu Goes Bankrupt
Washington Mutual Bank went bankrupt when its panicked depositors withdrew $16.7 billion in 10 days. It had insufficient capital to run its business. The FDIC then took over. The bank was sold to J.P. Morgan for $1.9 billion.
15September 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. It was the most in any single day in history. It didn't stop there. Global markets panicked:
The Morgan Stanley Capital International World Index dropped 6 percent in one day, the most since its creation in 1970.
- Brazil's Bovespa was halted after dropping 10 percent.
- The London Financial Times Stock Exchange dropped 15 percent.
- 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.
16October 3, 2008: Congress Passes $700 Billion Bailout Bill
17October 6: Global Stock Markets Collapse Despite Central Bank Action
Stock markets around the world plummeted, despite the bailout package. All bailouts do is keep the markets operating. It would take time for banks to trust each other again.
Central banks around the world did restore liquidity, as they’re supposed to. They stepped in to provide the overnight lending capability for the private banks. This helped keep the collapse from becoming a depression.
18October 7, 2008 - $1.7 Trillion Commercial Loan Program
The Federal Reserve agreed to directly issue short-term loans for businesses that couldn't get them elsewhere. Interest rates ranged from 2 to 4 percent, high under normal circumstances but low compared to Libor rates at the time. The Fed bought high-quality, three-month debt. Dozens of companies signed up. They included Morgan Stanley, the finance arm of General Electric, Ford Motor Credit, and GMAC Mortgage, LLC.
The Fed created this program to allow businesses to keep enough cash flow to stay in business. It would have prevented Washington Mutual's bankruptcy. The program also lowered interest rates by increasing liquidity.
19October 8 and 14, 2008: Central Banks Coordinate Global Action
On October 8, the Federal Reserve and the central banks of the European Union, Canada, the United Kingdom, Sweden, and Switzerland cut their rates by half a point. China's central bank cut its rate by 0.27 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.
On October 14, the governments of the EU, Japan, and the United States again took unprecedented coordinated action. The EU 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 was after the U.K. 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 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.
20October 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 cash overnight. Businesses hoarded cash because Libor rates skyrocketed as banks panicked and stopped lending to each other.
The Fed's Money Market Investor Funding Facility was managed by JPMorgan Chase. The MMIFF would purchase up to $600 billion of certificates of deposit, bank notes, and commercial paper that were coming 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.
The Fed’s Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, established September 19, had $122.8 billion of such loans outstanding as of October 15. On September 21, the Treasury guaranteed $50 billion worth of money market funds, as reported in an October 21, 2008, Bloomberg article. The fact that the Fed announced this new purchase program showed that credit markets were still partially frozen.
On October 29, one week later, the Fed lowered the fed funds rate to 1 percent.
21November 2008 - Auto Companies Request Bailout, Fed Creates TALF
On November 18, GM, Ford, and Chrysler their request for $50 billion in bailout funds. Senate Majority Leader Harry Reid said the Big Three should return with "... a responsible plan that gives us a realistic chance to get the needed votes." It didn't help the public's opinion of the automakers that the three CEOs flew to DC in corporate jets.
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.
On November 25, Treasury partnered with the Federal Reserve to use part of TARP to address a freeze in the consumer credit market. The $1 trillion secondary market for credit card, auto, and student debt had come to a standstill. That's because the debt had been sold as asset-backed securities. Investors were just as afraid to buy them as they were the subprime mortgage-backed securities. The Term Asset-Backed Securities Loan Facility program kept these credit card companies afloat. It bought their old debt, suffusing them with enough capital to avoid bankruptcy.
That same day, Treasury gave Citigroup a $20 billion cash infusion. It was in return for $27 billion of preferred shares yielding an 8 percent annual return and warrants to buy no more than 5 percent 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 percent from 6.38 percent.
The Fed successfully revived commercial bank lending with the Commercial Paper Facility, although activity stabilized. The question remained as to how much demand there would be for mortgages.
Many of the Fed’s programs, such as the Commercial Lending Program and a program to buy toxic credit card debt, had not yet had a chance to take effect.
22December: Zero Interest Rates, TARP, and Big 3 Bailout
On December 16, the FOMC dramatically lowered the fed funds rate to "between 0.25 points and zero," the lowest rate in its history. It lowered the discount rate to 0.5 percent. With that, the Fed couldn't lower rates any further. It used its other tools and created a few new ones.
On December 19, the Treasury inserted $105 billion in TARP funds into eight banks in return for preferred stock. The government would receive a 5 percent dividend, increasing to a painful 9 percent 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. But without the bailout, 1 million jobs could have been lost.
23More Crises Timelines
2008 Financial Crisis Timeline
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. They worked hard to avoid a complete collapse. They almost didn't succeed.