2009 Financial Crisis: Explanation, Timeline, Bailouts

How They Stopped the Madness

For most Americans, the financial crisis worsened in 2009. In March, the stock market plummeted even more, panicking investors who thought the worst was over. Foreclosures rose, despite government programs that just didn't do enough. In October, unemployment rate rose to 10% for the first time since 1982. 

However, the Obama Administration did push a $787 billion plan that created jobs, and economic growth finally turned positive by mid-year. Technically, the Great Recession was over. In reality, the damage was so deep that it took years before it felt like things were really getting better. For many, who remained unemployed, lost their homes and credit rating, or were forced to take jobs at a far lower pay, things only got worse. To find out the causes and earlier events, see Financial Crisis 2007 and Financial Crisis 2008 Timeline.

January

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A bank owned for sale sign is posted in front of a foreclosed home May 7, 2009 in Antioch, California.. Photo by Justin Sullivan/Getty Images

January 12 - Banks reported losing more than $1 trillion sSince the beginning of the Subprime Mortgage Crisis in 2007. That forced them to come up with $946 billion in capital to offset the losses. As a result, banks hoarded cash. That included the $350 billion they received from the U.S. Treasury as part of the Bank Bailout.

February

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The stimulus package focused on construction jobs.. Photo by Darren McCollester/Getty Images

February 13 - Congress approved the $787 Economic Stimulus Package initiated by President Barack Obama. It boosted economic growth by granting $288 billion in tax cuts, $224 billion in unemployment benefits, and $275 billion for "shovel-ready" public works. It also included a $2,500 college tuition tax credit,  an $8,000 tax credit for first-time homebuyers, and  a deduction of sales tax on new car purchases. The Act extended unemployment benefits and suspension of taxes on those benefits through 2009. It provided  $54 billion in tax writeoffs for small businesses. Later, the FY 2011 budget added $64 billion to extend many of the credits.  It contained many of the key points promoted by Obama in his campaign platform.  For more details, see the ARRA

February 18 - Obama announced a $75 billion plan to help stop foreclosures. The Homeowner Stability Initiative (HSI) was designed to help the 7-9 million homeowners avoid foreclosure by restructuring or refinancing their mortgage. before they get behind in their payments. Most banks won't allow a loan modification until the borrower misses three payments. It provides a $1,000-a-year principal payment for borrowers who stay current. It's paid out of TARP funds.

February 27 - The BEA final report revised its U.S. GDP growth rate for Q4 2008 to a negative 6.3%. (That was worse than the 6.1% drop it reported in its preliminary report, but better than the subsequent 8.1% decline.) It was the worst slowdown since Q1 1982 when GDP fell 6.4%. A strong dollar coupled with the global recession cut exports. The recession in the U.S. caused domestic demand to slump. Economic growth for all of 2008 was an anemic 1.1%. (Source: GDP News Release)

March

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A trader walks across the floor of the New York Stock Exchange near the end of the trading day on March 5, 2009 in New York City. Stocks finished lower as investors worried about further banking industry woes and automaker GM's viability.. Photo: Chris Hondros/Getty Images News

March 5 - The Dow dropped to 6,594.44 a total decline of 53.4% from its peak close of 14,164.43 on October 9, 2007. That was worse than any other bear market since the Great Depression of 1929. For more, see the Dow's Closing History.

April

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Many people found themselves underwater when housing prices fell below their mortgage value.. Photo: John Lund/Getty Images

The Making Homes Affordable Program is an initiative launched by the Obama Administration to help homeowners avoid foreclosure. HARP (Homeowner Affordable Refinance Program) is one of its programs. It was designed to stimulate the housing market by allowing up to 2 million credit-worthy homeowners who were upside-down in their homes to refinance, taking advantage of lower mortgage rates. Unfortunately, banks were just too risk-averse to help those with less-than-stellar credit. Instead, they cherry-picked applicants. The Obama Administration introduced HARP in April 2009. Two years later, only 810,00 homeowners were helped. More than 90% were less than 5% upside down. 

August

Many people lost their homes through foreclosures.. Photo: Getty Images

Foreclosures kept mounting, dimming hopes of an economic recovery. Banks could have prevented foreclosures by modifying loans. That would have hurt their bottom line, but record foreclosures - 360,149 in July - only made things worse. July's foreclosure rate was the highest since RealtyTrac began keeping records in 2005. It was 32% higher than in 2008.

Banks thought it was more profitable to foreclose on a house than to make a loan modification, according to some industry analysts. Foreclosures continued to rise when the adjustable-rate mortgages came due at higher rates.

More than half (57%) of foreclosures were from just four states: Arizona, California, Florida, and Nevada. California banks beefed up their foreclosure departments, expecting higher home losses. 

The Obama administration asked banks to voluntarily double loan modifications by November 1. The Making Home Affordable program generated more than 630,000 loan modifications. Some analysts said that banks were waiting for housing prices to improve before making loan modifications in the hopes they won't lose as much profit.

October

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The unemployment rate rose to 10.0% in October 2009, the worst since the 1982 recession. Nearly 6 million jobs were lost in the 12 months prior to that. Employer added temporary workers, too cautious about the economy to add full-time employees. However, the fields of healthcare and education continued to expand. This typically happens during a recession, as people either often react to unemployment by getting sicker from the stress or returning to school to get a new skill.

Meanwhile, a Federal Reserve report showed that lending was down 15% from the nation's four biggest banks: Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo. Between April and October 2009, these banks cut their commercial and industrial lending by $100 billion, according to the Treasury Department data. Loans to small businesses fell 4%, or $7 billion, during the same time period.

Lending from all banks surveyed showed the number of loans made fell 9% between October 2008 and October 2009. But the outstanding balance of all loans made went up 5%. That meant banks made larger loans to fewer recipients.

Why was bank lending down? A variety of reasons, depending on who you talk to. The banks say there were fewer qualified borrowers thanks to the recession. Businesses said the banks tightened up their lending standards. If you looked at the 18 months of potential foreclosures in the pipeline, it looked like banks were hoarding cash to prepare for future write-offs. They were also sitting on $1.1 trillion in government subsidies.

Bank of America pledged to President Obama it would increase lending to small and medium sized businesses by $5 billion in 2010.  But that's after they slashed lending by 21% ($58 billion) in 2009.

Why Not Let the Banks Go Bankrupt?

People walk past Washington Mutual Inc.'s headquarters
People walk past Washington Mutual Inc.'s headquarters September 16, 2008 in Seattle.. Photo by Robert Giroux/Getty Images

There was a lot of anger about the $350 billion in taxpayer dollars that was used to bail out the banks. Many people felt there was no oversight. They though the banks just used the money for executive bonuses, and they should not be rescued for making bad decisions based on greed. The argument goes that, if we had just let the banks go bankrupt, the worthless assets would have been written off. Other companies would purchase the good assets and the economy would be much stronger as a result. In other words, let capitalism do its thing.

That is what Former Treasury Secretary Hank Paulson attempted to do with Lehman Brothers. The result was a market panic. It created a run on the ultra-safe money market funds. That threatened to shut down cash flow to all businesses, large and small. In other words, the free market couldn't solve the problem without government help. In fact, most of the government funds were used to create the assets that allowed the banks to write down about $1 trillion in losses

Effects Since 2009

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A construction worker uses a saw to cut wood as he builds framing for a new house in a development June 26, 2006 in Richmond, California. A report issued by the U.S. Commerce Department stated that sales of new single-family homes were up 4.6 percent in May. The median price of homes sold in May slipped to $235,300, down 4.3 percent from April.. Photo by Justin Sullivan/Getty Images

The bill stopped the bank credit panic, allowed LIBOR rates to return to normal, and made it possible for everyone to get loans. Without credit market functioning, businesses are not able to get the capital they need to run their day-to-day business. Without the bill, it would have been impossible for people to get credit applications approved for home mortgages and even car loans. In a few weeks, the lack of capital would have lead to a shut-down of small businesses, who can't afford the high interest costs. Also, those whose mortgage rates reset would see their loan payments jump. This would have caused even more foreclosures. The Great Recession would have been a global depression. For more, see How the Bailout Affected You.

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