GLOBAL FINANCIAL CRISIS CREDIT CRUNCH OF 2008

Global financial crisis credit crunch of 2008



Global financial crisis credit crunch of 2008

Introduction

In 2008, a series of bank and insurance company failures triggered a financial crisis that effectively halted global credit markets and required unprecedented government intervention. Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government. Lehman Brothers declared bankruptcy on September 14th after failing to find a buyer. Bank of America agreed to purchase Merrill Lynch (MER), and American International Group (AIG) was saved by an $85 billion capital injection by the federal government. Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history.[2] In fact, by September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007.[3] These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone.

The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential properties saw their values increase precipitously in a real estate boom that began in the 1990s and increased uninterrupted for nearly a decade. Increases in housing prices coincided with a period of government deregulation that not only allowed unqualified buyers to take out mortgages but also helped blend the lines between traditional investment banks and mortgage lenders. Real estate loans were spread throughout the financial system in the form of CDOs and other complex derivatives in order to disperse risk; however, when home values failed to rise and home owners failed to keep up with their payments, banks were forced to acknowledge huge write downs and write offs on these products. These write downs found several institutions at the brink of insolvency with many being forced to raise capital or go bankrupt.

Discussion

For 50 years after WWII, the U.S. housing market grew steadily with just a few set backs as prices increased. The government policies during this era had their roots in the agencies and government entities created in reaction to the massive mortgage foreclosures that occurred during the great depression. During 1930's Great Depression the US had experienced a greater mortgage crisis than the one we are experiencing now. In 1933, about half of mortgage debt was in default, the unemployment rate had reached about 25 percent. Thousands of banks and savings and loans had failed. The amount of annual mortgage lending had dropped about 80 percent, as had private residential construction. States were enacting moratoriums on foreclosures. In response to this, the Home Owners Lending Corporation (HOLC) was created in 1933. The average borrower that the HOLC eventually refinanced was two years' delinquent on the original mortgage and about three years behind on property taxes. The HOLC was a created to handle the immediate problem of mortgage foreclosures. Congress created the Federal Housing Administration (FHA) in 1933 as a long term solution for stabilizing ...