Stock Market Crash of 2008
Follow the Timeline to Understand Why It Crashed
The stock market crash of 2008 occurred on September 29, 2008. The Dow Jones Industrial Average fell 777.68 points in intra-day trading. Until 2018, it was the largest point drop in history. It plummeted because Congress rejected the bank bailout bill. But the crash had been building for a long time.
The Dow hit its pre-recession high on October 9, 2007, closing at 14,164.43. Less than 18 months later, it had dropped more than 50 percent to 6,594.44 on March 5, 2009.
That wasn't the largest decline in history. During the Great Depression, the stock market dropped 90 percent. But that took three years. What caused this crash? Follow the timeline below to understand exactly how it happened.
The Dow opened the year at 12,459.54. It rose despite growing concerns about a housing market slowdown. On November 17, 2006, the Commerce Department warned that October's new home permits were 28 percent lower than the year before. But government officials didn't think the housing slowdown would affect the rest of the economy. In fact, they were relieved that the overheated real estate market appeared to be returning to normal.
But as home prices fell, they triggered subprime mortgage defaults. By August 2007, the Federal Reserve recognized that banks didn’t have enough liquidity to function. The Fed began adding liquidity by buying banks’ subprime mortgages. By October, some economists warned about the widespread use of collateralized debt obligations and other derivatives.
By late November, Treasury Secretary Hank Paulson launched a bank-funded Superfund to purchase toxic debt.
As the year drew to a close, the Bureau of Economic Analysis revised its estimate of growth up. It said that the nation’s gross domestic product had increased 0.5 percent in the third-quarter. Its prior estimate said it had shrunk 0.5 percent.
It seemed the U.S. economy could shrug off a housing downturn and banks’ liquidity constraints. The Dow ended the year just slightly off its October high, at 13,264.82.
At the end of January, the BEA revised its fourth quarter GDP growth estimate down. It said growth was only 0.6 percent. The economy lost 17,000 jobs, the first time since 2004. The Dow shrugged off the news, and hovered between 12,000 and 13,000 until March.
On March 17, the Federal Reserve intervened to save the failing investment bank Bear Stearns, the first casualty of the subprime mortgage crisis. The Dow dropped to an intra-day low of 11,650.44, but seemed to recover. In fact, many thought the Bear Stearns rescue would relieve investors. They expected the intervention would keep avoid a bear market. By May, the Dow rose above 13,000. It seemed the worst was over.
In July 2008, the subprime mortgage crisis threatened government-sponsored agencies Fannie Mae and Freddie Mac. They required a government bailout. The Treasury Department guaranteed $25 billion of their loans and bought shares of Fannie's and Freddie's stock. The FHA guaranteed $300 billion in new loans. The Dow fell, closing at 10,962.54 on July 15.
It rebounded, and remained above 11,000 for the rest of the summer.
The month started with chilling news. On Monday, September 15, 2008, Lehman Brothers declared bankruptcy. The Dow dropped 504.48 points.
On Tuesday, September 16, the Fed announced it was bailing out insurance giant AIG. It made an $85 billion "loan" in return for 79.9 percent equity, effectively taking ownership. AIG had run out of cash. It was scrambling to pay off credit default swaps it had issued against now-failing mortgage-backed securities.
On Wednesday, September 17, money market funds lost $144 billion. That's where most businesses park their overnight cash. Companies had panicked, switching to even safer Treasury notes. They did this because Libor rates were high. Banks had driven up rates because they were afraid to lend to each other.
The Dow fell 449.36 points.
On Thursday, September 18, markets rebounded 400 points. Investors learned about a new bank bailout package.
On Friday, September 19, the Dow ended the week at 11,388.44. It was only slightly below its Monday open of 11,416.37. The Fed established the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. It loaned $122.8 billion to banks to buy commercial paper from money market funds. The Fed's announcement confirmed that credit markets were partially frozen and in panic mode.
On Saturday, September 20, Hank Paulson and Ben Bernanke sent the bank bailout bill to Congress. The Dow bounced around 11,000 until September 29, when the Senate voted against the bailout bill. The Dow fell 777.68 points, the most in any single day in history. Global markets also panicked, as well:
- The MSCI World Index dropped 6 percent in one day, the most since its creation in 1970.
- Brazil's Ibovespa was halted after dropping 10 percent.
- The London FTSE dropped 15 percent.
- Gold soared to over $900 an ounce.
- Oil dropped to $95 a barrel.
To restore financial stability, the Fed 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.
Congress finally passed the bailout bill in early October, but the damage had already been done. The Labor Department reported that the economy had lost a whopping 159,000 jobs in the prior month. On Monday, October 6, the Dow dropped 800 points, closing below 10,000 for the first time since 2004.
The Fed tried to prop up banks by lending $540 billion to money market funds. The funds needed the cash to meet a continuing barrage of redemptions. Since August, more than $500 billion had been withdrawn from money markets.
JPMorgan Chase managed the Fed's Money Market Investor Funding Facility. It purchased up to $600 billion of certificates of deposit, bank notes, and commercial paper that would come due in 90 days. The remaining $60 billion came from the money markets themselves. But they were also purchasing commercial paper from the MMIFF.
The Fed quickly lowered the fed funds rate to just 1 percent. But the Libor bank lending rate rose to its high of 3.46 percent. The Fed also coordinated a global central bank bailout.
The Dow responded by plummeting 13 percent throughout the month. By the end of October, the BEA released more sobering news. The economy had contracted 0.3 percent in the third quarter. The nation was in recession.
The month began with more bad news. The Labor Department reported that the economy had lost a staggering 240,000 jobs in October. The AIG bailout grew to $150 billion. Treasury announced it was using part of the $700 billion bailout to buy preferred stocks in the nations' banks. The Big Three automakers asked for a federal bailout. By November 20, 2008, the Dow had plummeted to 7,552.29, a new low. But the stock market crash of 2008 was not over yet.
The Fed dropped the fed funds rate to zero, its lowest level in history. The Dow ended the year at a sickening 8,776.39, down almost 34 percent for the year.
In a burst of optimism, the Dow climbed to 9,034.69 on January 2, 2009. Investors believed the new Obama administration could tackle the recession with his team of economic advisers. But the bad economic news continued. The Dow plummeted to its bottom of 6,594.44 on March 5, 2009.
Soon afterward, Obama's economic stimulus plan instilled the confidence needed to stop the panic. On July 24, 2009, the Dow reached a higher high. It closed at 9,093.24, beating its January high. For most, the stock market crash of 2008 was over.
Investors bore the emotional scars from the crash for the next four years. On June 1, 2012, they panicked over a poor May jobs report and the eurozone debt crisis. The Dow dropped 275 points, and the 10-year benchmark Treasury yield dropped to 1.443 during intraday trading. This was the lowest rate in more than 200 years. It signaled that the confidence that evaporated during 2008 had not quite returned to Wall Street.
In 2013, the stock market finally recovered. In the first six months, it gained more points than in any year on record. Stock prices rose faster than earnings, creating an asset bubble. The Dow set over 250 closing records until February 2018. Fears of inflation and higher interest rates almost sent the Dow into a correction. Like many other past stock market crashes, it did not lead to a recession.