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The British government nationalized most of the financial institutions in trouble. Many European governments followed suit, as well as the US government. Stock markets appeared to have stabilized as October ended. In addition, the falling prices due to reduced demand for oil , coupled with projections of a global recession, brought the s energy crisis to temporary resolution.
As local currencies in those countries lost value, making payment on such loans became progressively more difficult. As the financial panic developed during September and October , there was a " flight-to-quality " as investors sought safety in U. Treasury bonds , gold , and currencies such as the US dollar still widely perceived as the world's reserve currency and the Yen mainly through unwinding of carry trades.
This currency crisis threatened to disrupt international trade and produced strong pressure on all world currencies. The International Monetary Fund had limited resources relative to the needs of the many nations with currency under pressure or near collapse.
However, as events progressed during early , it was U. Treasury bonds which were the main refuge chosen. This inflow of money into the United States translated into an outflow from other countries restricting their ability to raise money for local rescue efforts. On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. The significance of the Lehman Brothers bankruptcy is disputed with some assigning it a pivotal role in the unfolding of subsequent events.
The principals involved, Ben Bernanke and Henry Paulson, dispute this view, citing a volume of toxic assets at Lehman which made a rescue impossible. The same day, the sale of Merrill Lynch to Bank of America was announced. On September 16, the large insurer American International Group AIG , a significant participant in the credit default swaps markets, suffered a liquidity crisis following the downgrade of its credit rating.
This resulted in demands from investors to return their funds as the financial crisis mounted. Treasury offered temporary insurance akin to Federal Deposit Insurance Corporation insurance of bank accounts to money market funds. On September 19, , a plan intended to ameliorate the difficulties caused by the subprime mortgage crisis was proposed by the Secretary of the Treasury, Henry Paulson.
He proposed a Troubled Assets Relief Program TARP , later incorporated into the Emergency Economic Stabilization Act , which would permit the United States government to purchase illiquid assets, informally termed toxic assets , from financial institutions. Securities and Exchange Commission , Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage-backed securities. Of this time the President later said: " I was told by [my] chief economic advisors that the situation we were facing could be worse than the Great Depression.
The draft proposal of the plan was received favorably by investors in the stock market. Details of the bailout remained to be acted upon by Congress. On Sunday, September 21, the two remaining US investment banks , Goldman Sachs and Morgan Stanley , with the approval of the Federal Reserve, converted to bank holding companies , a status subject to more regulation, but with readier access to capital. The US administration was pressuring other countries to set up similar bailout plans.
On Monday and Tuesday during the week of September 22, appearances were made by the US Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve before Congressional committees and on Wednesday a prime-time presidential address was delivered by the President of the United States on television. Behind the scenes, negotiations were held refining the proposal which had grown to 42 pages from its original 3 and was reported to include both an oversight structure and limitations on executive salaries, with other provisions under consideration.
On September 25, agreement was reported by congressional leaders on the basics of the package;  however, general and vocal opposition to the proposal was voiced by the public. Shelby , strongly opposing the proposal. It was reported on Monday morning, September 29, that Wachovia , the 4th largest bank in the United States, would be acquired by Citigroup. On Monday the German finance minister announced a rescue of Hypo Real Estate , a Munich -based holding company comprising a number of real estate financing banks, but the deal collapsed on Saturday, October 4.
The same day the government of Iceland nationalized Glitnir , Iceland's third largest lender. Stocks fell dramatically Monday in Europe and the US despite infusion of funds into the market for short term credit. The U. On Tuesday, September 30, stocks rebounded but credit markets remained tight with the London Interbank Offered Rate overnight dollar Libor rising 4. After Irish banks came under pressure on Monday, September 29, the Irish government undertook a two-year "guarantee arrangement to safeguard all deposits retail, commercial, institutional and inter-bank , covered bonds, senior debt and dated subordinated debt lower tier II " of 6 Irish banks: Allied Irish Banks , Bank of Ireland , Anglo Irish Bank , Irish Life and Permanent , Irish Nationwide and the EBS Building Society ; the potential liability involved is about billion dollars.
Key risk indicators became highly volatile during September , a factor leading the U. It is the difference between: 1 the risk-free three-month U. A higher spread indicates banks perceive each other as riskier counterparties. The t-bill is considered "risk-free" because the full faith and credit of the U. The TED spread reached record levels in late September A three-month t-bill yield so close to zero means that people are willing to forgo interest just to keep their money principal safe for three months — a very high level of risk aversion and indicative of tight lending conditions.
Driving this change were investors shifting funds from money market funds generally considered nearly risk free but paying a slightly higher rate of return than t-bills and other investment types to t-bills. President George W. They only approved the bill on Oct. It did this by buying shares of the companies it bailed out when prices were low and wisely selling them when prices were high.
The TARP funds helped in five areas:. Instead, he asked Congress for an economic stimulus package. On February 17, , he signed the American Recovery and Reinvestment Act, which included tax cuts, stimulus checks, and public works spending. It also allows the Fed to reduce bank size for those that become too big to fail. Meanwhile, banks keep getting bigger and are pushing to minimize or get rid of even this regulation.
The financial crisis of proved that banks could not regulate themselves. Without government oversight like Dodd-Frank, they could create another global crisis. Securitization, or the bundling and reselling of loans, has spread to more than just housing. To prevent further destabilization, stronger regulations of these derivatives should be considered.
The financial crisis was widespread. Most banks felt some impact, but not all banks needed to be bailed out. Fannie Mae and Freddie Mac needed to be bailed out, as well. Kareem Serageldin was sentenced to 30 months in prison for using his position at Credit Suisse to hide losses in mortgage-backed securities.
Accessed Feb. Bureau of Labor Statistics. Department of Housing and Urban Development. Housing Market Conditions ," Page 4. Board of Governors of the Federal Reserve System. Government Publishing Office. University of Arkansas. Securities and Exchange Commission. Office of Investor Education and Advocacy. Federal Deposit Insurance Corporation. Journal of Economic Perspectives. Congressional Research Service.
The Federal Reserve Board. Congressional Budget Office. Brookings Institute. Table of Contents Expand. Table of Contents. Causes of the Crisis. Cost of the Crisis. Troubled Asset Relief Program. How It Could Happen Again.
By Kimberly Amadeo. Learn about our editorial policies. Reviewed by Erika Rasure. Learn about our Financial Review Board. Deregulation of financial derivatives was a key underlying cause of the financial crisis. Which banks were affected by the financial crisis? Who went to jail for the financial crisis? Article Sources.
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