2001: The Fed Cuts Rates to a 40-Year Low
The Federal Reserve (a private corporation owned by a handful of private banks and, since 1913, put in charge of the country’s monetary policy and money supply/printing) cuts interest rates nine times in 2001 to a 40-year low of 2.5%. Low interest rates make money cheap to borrow, so cash begins to flood the economy. Banks bolster their bets with enormous quantities of debt. Wall Street firms will soon have an average debt to capital ratio of 32 to 1.
With Banks Quick to Lend, the Subprime Mortgage Market Booms
With lots of cash on hand, banks lend to anyone and everyone to buy a house, including those with poor credit history (i.e. “subprime” mortgages). After signing on the dotted line, many homeowners (who are enjoying soaring housing prices) take out lines of credit on their new home equity. Banks are selling the mortgages they make and pooling them into financial products (“securities”), many of which the rating agencies say are safe (rating the securities AAA, when really they’re mostly junk!). Banks then sell the products to one other (mortgage-backed securities) en masse, and even buy and sell insurance for..Read More
Mid-2004: Interest Rates Rise Sharply, and Americans With Subprime Mortgages Begin Defaulting
Homeowners witness a steady rise in U.S. interest rates from 1 to 5.45 percent just in 2004. Owners of subprime mortgages begin defaulting. By 2006, defaults on subprime mortgages rise to record levels, affecting the value of both mortgage backed securities and credit default swaps (of which the banks own a ton, uh oh…).
Freddie Mac Stops Buying Subprime Loans, Foreclosures Rise
Freddie Mac, one of the largest buyers of mortgages and a government-backed entity, says it will no longer buy the most risky subprime loans. The housing crisis deepens and more subprime borrowers default. Mortgage-backed securities and credit default swaps, which all of the banks either own or pledged insurance for, are turning sour.
More Cracks In the Armor: Mortgage Companies Ailing
A leading subprime mortgage lender, New Century Financial Corp, files for Chapter 11 bankruptcy protection. Later that month, another mortgage giant, Countrywide Financial, announces a 37% tumble in profits in its first quarter; despite layoffs and attempts to raise money, its revenues and profits continue to dive month after month.
The Party on Wall Street’s Ending
The peak of the economic bubble has been reached. Wall Street has enjoyed all-time highs these last few years. In 2007, financial services will have accounted for over 40% of U.S. corporate profits, with its employees raking in a collective $53 billion. Goldman Sachs CEO Lloyd Blankfein will have taken home $68 million.
Wall Street’s Crashing and Burning: Layoffs Like We’ve Never Seen Before
This financial crisis was different–it was doom itself. The article below describes the destruction well, picture: 4,000 dismissals at Morgan Stanley, 5,000 at Merrill Lynch, 7,000 at UBS, 16,000 at Citigroup. Bear was the firm to work at a year ago, and now it’s gone–10,000 of its former employees looking for work. The ripple effect: more mortgage unpaid, evictions, kids pulled out of school, families moving, marriages falling apart, careers ended, nervous breakdowns, economy slips further, more layoffs… repeat. James J. Cramer, “Wall Street is in the midst of its biggest, ugliest, worst round of layoffs in decades,” NY Magazine..Read More
The Government Takes Over Fannie Mae and Freddie Mac
The U.S. government takes over Fannie Mae and Freddie Mac. Fannie Mae (est. 1938) and Freddie Mac (est. 1938) were government backed entities that bought mortgages from banks and repackaged them into securities and sold these to investors. After selling the mortgage it had just made to Fannie (retail banks) or Freddie (smaller banks), a bank’s money was freed up to lend again; with the added capital into the system, banks could lend to more people and at easier terms (for example creating the popular 30-year mortgage), which put buying a home within reach for the lower and middle classes.
Wall Street CEOs meet at the Federal Reserve Bank of New York for an Emergency Meeting to Save Lehman Brothers (and others)
Over a dozen Wall Street CEOs meet at the Federal Reserve Bank of New York (with Treasury Secretary Hank Paulson, Fed Chairman Ben Bernanke, and NY Fed President Timothy Geithner) for an all-hands-on-deck meeting. Their assignment is to come up with a plan to save Lehman Brothers, the nation’s fourth-largest investment bank, or risk the collateral damage that might follow in the markets. They also scramble to save Merrill Lynch, another icon of Wall Street, and global insurance giant American International Group (AIG), which insured a lot of now-worthless mortgage-backed securities.
Lehman Brothers Not Saved: Will File for Bankruptcy
Barclays ends its bid to purchase all or part of Lehman, and a deal to rescue the bank collapses (it turned out that the deal was agreed to, but was then vetoed by the Bank of England and the UK’s Financial Services Authority). Unable to be saved, the next day Lehman Brothers files for Chapter 11 bankruptcy–the largest bankruptcy in U.S. history (over US$600 billion in assets). Also on September 15, 2008, Bank of America announces plan to buy Merrill Lynch & Co for $50 billion.
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