Subprime mortgage crisis and Stig Saeterbakken: Difference between pages
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[[Image:TED Spread Chart - Data to 9 26 08.png|thumb|The [[TED spread]] – an indicator of credit risk – increased dramatically during September 2008.]] |
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The '''subprime mortgage crisis''' is an ongoing economic problem that became more apparent during 2007 and 2008, and is characterized by contracted [[liquidity]] in the global credit markets and banking system. The downturn in the U.S. housing market, risky lending and borrowing practices, and excessive individual and corporate debt levels have caused multiple adverse effects on the [[world economy]]. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and regulatory framework. |
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The crisis began with the bursting of the [[United States housing bubble]]<ref name="Moyers Morgenson">{{cite episode | title = Episode 06292007 | series = [[Bill Moyers Journal]] | network = [[PBS]] | transcripturl = http://www.pbs.org/moyers/journal/06292007/transcript5.html | airdate = 2007-06-29}}</ref><ref name="WSJ Housing Bubble Burst">{{cite news | author = Justin Lahart | title=Egg Cracks Differ In Housing, Finance Shells | work = [[WSJ.com]] | publisher=''[[Wall Street Journal]]'' | url=http://online.wsj.com/article/SB119845906460548071.html?mod=googlenews_wsj | date = 2007-12-24 | accessdate = 2008-07-13 | quote=It's now conventional wisdom that a housing bubble has burst. In fact, there were two bubbles, a housing bubble and a financing bubble. Each fueled the other, but they didn't follow the same course. }}</ref> and high default rates on "[[subprime lending|subprime]]" and [[adjustable rate mortgage]]s (ARM), beginning in approximately 2005–2006. For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. [[default (finance)|Defaults]] and [[foreclosure]] activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM [[interest]] rates reset higher. [[Foreclosure]]s accelerated in the United States in late 2006 and triggered a [[financial crisis of 2007-2008|global financial crisis through 2007 and 2008]]. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.<ref>{{cite news | title = U.S. FORECLOSURE ACTIVITY INCREASES 75 PERCENT IN 2007 | url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847 |work= realtytrac.com |publisher= RealtyTrac Inc |accessdate=2008-05-19 | year = 2008 }}</ref> |
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Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=atGti_UmcPnM&refer=home|title=Bloomberg.com: Worldwide<!-- Bot generated title -->}}</ref><ref name = "sgsntp">{{cite news | author = Yalman Onaran | title = Subprime Losses Top $379 Billion on Balance-Sheet Marks: Table | url = http://www.bloomberg.com/apps/news?pid=20601087&sid=aK4Z6C2kXs3A&refer=home | work = [[Bloomberg.com]] | publisher = [[Bloomberg L.P.]] | date = 2008-05-19 | accessdate = 2008-06-04}}</ref> In addition, the ability of corporations to obtain funds through the issuance of [[commercial paper]] was affected. This aspect of the crisis is consistent with a [[credit crunch]]. The [[liquidity]] concerns drove central banks around the world to intervene by bailing out defaulting financial corporations in order to encourage lending to worthy borrowers at the expense of tax payers. |
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The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal Reserve to cut interest rates and the [[Economic Stimulus Act of 2008|economic stimulus package]] passed by Congress and signed by President [[George W. Bush]] on February 13, 2008.<ref>{{cite press release | title = FRB: Press Release—FOMC statement—22 January 2008 | publisher = [[Federal Reserve]] | date = 2008-01-22 | url=http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm | accessdate=2008-06-05 | year = 2008 }}</ref><ref>{{cite news | title = Full speed ahead | url=http://www.economist.com/world/na/displaystory.cfm?story_id=10589983 | work economist.com | publisher = [[The Economist]] | date = 2008-01-24 | accessdate=2008-06-05 }}</ref><ref name="Yahoo-mail">{{cite news | author = Jeannine Aversa | title = Rebate Checks in the Mail by Spring | url=http://www.huffingtonpost.com/2008/02/13/rebate-checks-in-the-mail_n_86525.html | work = [[The Huffington Post]] | publisher = [[Arianna Huffington]] | date = 2008-02-13 | accessdate=2008-05-19 }}</ref> Following a series of ad-hoc market interventions to bail out particular firms, a [[Proposed bailout of U.S. financial system (2008)|$700 billion proposal]] was presented to the U.S. Congress in September, 2008. These actions are designed to stimulate economic growth and inspire confidence in the financial markets. On 3 October 2008, the amended version of the bill was signed into law. |
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==Economic background== |
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[[Image:Foreclosure Trend - 2007.png|thumb|Number of U.S. household properties subject to foreclosure actions by quarter.]] |
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[[Image:Financial Leverage Profit Engine.png|thumb|Understanding financial leverage.]] |
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{{further|[[Subprime crisis background information]]}} |
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[[Subprime lending]] is the practice of making [[loans]] to borrowers who do not qualify for [[Interest rate#Market interest rates|market interest rates]] owing to various risk factors, such as income level, size of the down payment made, [[credit history]], and employment status. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007,<ref>{{cite news | title = How severe is subprime mess? | url=http://www.msnbc.msn.com/id/17584725 | accessdate=2008-07-13 | work = [[msnbc.com]] | publisher = [[Associated Press]] | date = 2007-03-13 | accessdate = 2008-07-13 }}</ref> with over 7.5 million first-[[lien]] <!-- lien is not a misspelling - read the article -->subprime mortgages outstanding.<ref>{{cite speech | title = The Subprime Mortgage Market | author = [[Ben S. Bernanke]] | date = 2007-05-17 | location = [[Chicago, Illinois]] | url=http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm | accessdate=2008-07-13 }}</ref> Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005.<ref>{{cite speech | title = The Recent Financial Turmoil and its Economic and Policy Consequences | author = [[Ben S. Bernanke]] | date = 2007-10-17 |location = [[New York, New York]] | url=http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm | accessdate=2008-07-13 }}</ref> By January 2008, the delinquency rate had risen to 21%<ref name = "Bernanke20080110a">{{cite speech | title = Financial Markets, the Economic Outlook, and Monetary Policy | author = [[Ben S. Bernanke]] | date = 2008-01-10 | location = [[Washington, D.C.]] | url=http://www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm | accessdate=2008-06-05 }}</ref> and by May 2008 it was 25%.<ref>{{cite speech |
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| title = Mortgage Delinquencies and Foreclosures |
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| author = Bernanke, Ben S |
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| date = 2008-05-05 |
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| location = Columbia Business School's 32nd Annual Dinner, New York, New York |
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| url = http://www.federalreserve.gov/newsevents/speech/Bernanke20080505a.htm |
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| accessdate=2008-05-19 |
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}}</ref> |
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The U.S. mortgage market is estimated at $12 trillion<ref name="nytimes1">{{cite web|url=http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink|title=NY Times}}</ref> with approximately 9.2% of loans either delinquent or in foreclosure through August 2008.<ref name="mbaa1">{{cite web|url=http://www.mbaa.org/NewsandMedia/PressCenter/64769.htm|title=MBA Survey}}</ref> Subprime ARMs only represent 6.8% of the loans outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007.<ref>{{cite press release | title = Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey | publisher = [[Mortgage Bankers Association]] | date = 2007-06-12 | url=http://www.mbaa.org/NewsandMedia/PressCenter/58758.htm | accessdate=2008-07-13 }}</ref> During 2007, nearly 1.3 million properties were subject to foreclosure filings, up 79% versus 2006.<ref>{{cite news | title=U.S. FORECLOSURE ACTIVITY INCREASES 75 PERCENT IN 2007 | date=2008-01-29 | publisher= RealtyTrac | url=http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=3988&accnt=64847 | accessdate= 2008-06-06}}</ref> |
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== Understanding the risks of default== |
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Traditionally, banks lent money to homeowners for their mortgage and retained the risk of default, called [[credit risk]]. However, due to financial innovations, banks can now sell rights to the mortgage payments and related credit risk to investors, through a process called [[securitization]]. The securities the investors purchase are called [[mortgage backed securities]] (MBS) and [[collateralized debt obligations]] (CDO). This new "originate to distribute" banking model means credit risk has been distributed broadly to investors, with a series of consequential impacts. There are four primary categories of risk involved: [[credit risk]], asset price risk, [[liquidity risk]], and counterparty risk. Each of these risk types is described separately in the [[Subprime crisis background information|background information]]. |
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====Understanding the market mechanisms affecting corporations and investors==== |
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There is a greater interdependence now than in the past between the U.S. housing market and global financial markets due to MBS. When homeowners default, the amount of cash flowing into MBS declines and becomes uncertain. Investors and businesses holding MBS have been significantly affected. The effect is magnified by the high debt levels maintained by individuals and corporations, sometimes called [[financial leverage]]. The mechanisms through which a decline in housing prices affects market participants is described separately in the [[Subprime crisis background information|background information]]. |
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==Causes of the crisis== |
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The reasons for this crisis are varied and complex.<ref name="FT-interactive">{{cite web | title = FT.com / Video & Audio / Interactive graphics - Credit squeeze explained | url=http://www.ft.com/cms/s/2/c2c12708-6d10-11dc-ab19-0000779fd2ac.html | accessdate=2008-05-19 | year = 2008 }}</ref> The crisis can be attributed to a number of factors pervasive in both the housing and credit markets, which developed over an extended period of time. Some of these include: the inability of homeowners to make their [[mortgage]] payments, poor judgment by the borrower and/or the lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial innovation that distributed and perhaps concealed default risks, central bank policies, and regulation (or lack thereof).<ref>http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html Time-Stiglitz]</ref> |
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===Boom and bust in the housing market=== |
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{{further|[[United States housing bubble]], [[United States housing market correction]]}} |
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[[Image:Existing Home Sales Chart - v 1.0.png|thumb|Existing homes sales, inventory, and months supply, by quarter.]] |
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[[Image:ARMs Indexes 1996-2006.svg|thumb|Common indexes used for adjustable rate mortgages (1996–2006).]] |
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A combination of low interest rates easy credit for many years leading up to the crisis.<ref>{{cite web|url=http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html|title=President Bush's Address to Nation}}</ref> Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. The overall U.S. home ownership rate increased from 64% in 1994 (about where it was since 1980) to a peak in 2004 with an all-time high of 69.2%.<ref>{{cite news | title=CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP | date=26 October 2007| publisher= U.S. Census Bureau | url=http://www.census.gov/hhes/www/housing/hvs/qtr307/q307press.pdf }}</ref> |
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This demand helped fuel housing price increases and consumer spending.<ref>{{cite web|url=http://www.realestatejournal.com/buysell/markettrends/20051223-simon.html|title=www.realestatejournal.com/buysell/markettrends/20051223-simon.html<!--INSERT TITLE-->}}</ref> Between 1997 and 2006, American home prices increased by 124%.<ref>{{cite web | title = CSI: credit crunch | Economist.com | url=http://www.economist.com/specialreports/displaystory.cfm?story_id=9972489 | accessdate=2008-05-19 | year = 2008 }}</ref> Some homeowners used the increased property value experienced in the [[housing bubble]] to refinance their homes with lower interest rates and take out [[second mortgage]]s against the added value to use the funds for consumer spending. U.S. household debt as a percentage of income rose to 130% during 2007, versus 100% earlier in the decade.<ref name="economist-downtown">{{cite web | title = America's economy | Getting worried downtown | Economist.com | url=http://www.economist.com/world/na/displaystory.cfm?story_id=10134077 | accessdate=2008-05-19 | year = 2008 }}</ref> A culture of consumerism is a factor "in an economy based on immediate gratification".<ref>{{cite web | quote=in an economy based on immediate gratification | author=Lasch, Christopher | title=The Culture of Consumerism | publisher=Smithsonian Center for Education and Museum Studies | work=Consumerism | url=http://smithsonianeducation.org/idealabs/ap/essays/consume.htm | pages=1 | accessdate=2008-09-15 }}</ref>{{Fact|date=October 2008}} |
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Overbuilding during the boom period eventually led to a surplus inventory of homes, causing home prices to decline, beginning in the summer of 2006. Easy credit, combined with the assumption that housing prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages (ARMs) they could not afford after the initial incentive period. Once housing prices started depreciating moderately in many parts of the U.S., refinancing became more difficult. Some homeowners were unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts. |
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An estimated 8.8 million homeowners — nearly 10.8% of total homeowners — have zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage. This provides an incentive to "walk away" from the home, despite the credit rating impact.<ref>{{cite web|url=http://www.nytimes.com/2008/02/22/business/22homes.html|title=Negative Equity}}</ref> |
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Increasing foreclosure rates and unwillingness of many homeowners to sell their homes at reduced market prices have significantly increased the supply of housing inventory available. Sales volume (units) of new homes dropped by 26.4% in 2007 versus the prior year. By January 2008, the inventory of unsold new homes stood at 9.8 months based on December 2007 sales volume, the highest level since 1981.<ref name = "MSNBC-newhome">{{cite web | title = New home sales fell by record amount in 2007 - Real estate - MSNBC.com | url=http://www.msnbc.msn.com/id/22880294/ | accessdate=2008-05-19 | year = 2008 }}</ref> Further, a record of nearly four million unsold existing homes were for sale,<ref>{{cite web | title = Housing Meltdown | url=http://www.businessweek.com/magazine/content/08_06/b4070040767516.htm?chan=rss_topStories_ssi_5 | accessdate=2008-05-19 | year = 2008 }}</ref> including nearly 2.9 million that were vacant.<ref>{{cite web|url=http://biz.yahoo.com/cnnm/080513/051208_q12008_home_prices.html|title=Vacant homes 2.9 MM}}</ref> |
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This excess supply of home inventory places significant downward pressure on prices. As prices decline, more homeowners are at risk of default and foreclosure. According to the S&P/Case-Shiller price index, by November 2007, average U.S. housing prices had fallen approximately 8% from their Q2 2006 peak<ref name="economist-downtown" /> and by May 2008 they had fallen 18.4%.<ref>{{cite web|url=http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,1,0,0,0,0,0.html|title=Case Shiller Data File}}</ref> The price decline in December 2007 versus the year-ago period was 10.4% and for May 2008 it was 15.8%.<ref>{{cite web|url=http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_072943.pdf|title=Case Shiller Index May 2008|format=PDF}}</ref> Housing prices are expected to continue declining until this inventory of surplus homes (excess supply) is reduced to more typical levels. |
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===Speculation=== |
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Speculation in real estate was a contributing factor. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, nearly 40% of home purchases (record levels) were not primary residences. NAR's chief economist at the time, David Lereah, stated that the fall in investment buying was expected in 2006. "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market."<ref>{{cite web|url=http://money.cnn.com/2007/04/30/real_estate/speculators_fleeing_housing_markets/index.htm|title=Speculation statistics}}</ref> |
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While homes had not traditionally been treated as investments like stocks, this behavior changed during the housing boom. For example, one company estimated that as many as 85% of condominium properties purchased in Miami were for investment purposes. Media widely reported the behavior of purchasing condominiums prior to completion, then "flipping" (selling) them for a profit without ever living in the home.<ref>{{cite web|url=http://www.local10.com/news/4277615/detail.html|title=Speculative flipping}}</ref> Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.<ref>{{cite web|url=http://realtytimes.com/rtpages/20050321_tighterrules.htm|title=Speculation Risks}}</ref> |
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Keynesian economist [[Hyman Minsky]] described three types of speculative borrowing that can contribute to the accumulation of debt that eventually leads to a collapse of asset values:<ref>{{cite web|url=http://www.dailyreckoning.co.uk/economic-forecasts/hyman-minsky-why-is-the-economist-suddenly-popular.html|title=www.dailyreckoning.co.uk/economic-forecasts/hyman-minsky-why-is-the-economist-suddenly-popular.html<!--INSERT TITLE-->}}</ref><ref>{{cite web|url=http://mises.org/story/2787|title=mises.org/story/2787<!--INSERT TITLE-->}}</ref> the "hedge borrower" who borrows with the intent of making debt payments from cash flows from other investments; the "speculative borrower" who borrows based on the belief that they can service interest on the loan but who must continually roll over the principal into new investments; and the "Ponzi borrower" (named for [[Charles Ponzi]]), who relies on the appreciation of the value of their assets (e.g. real estate) to refinance or pay-off their debt but cannot repay the original loan. |
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The role of speculative borrowing has been cited as a contributing factor to the subprime mortgage crisis.<ref>{{cite news | title = H. P. Minsky, 77, Economist Who Decoded Lending Trends | url=http://query.nytimes.com/gst/fullpage.html?res=990CEEDB1F30F935A15753C1A960958260 | author = LOUIS UCHITELLE | accessdate=2008-09-26 | publisher = [[New York Times]] | date = October 26, 1996 | accessdate = 2008-07-13}}</ref> |
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===High-risk loans=== |
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A variety of factors have caused lenders to offer an increasing array of higher-risk loans to higher-risk borrowers. The share of subprime mortgages to total originations was 5% ($35 billion) in 1994,<ref name = "bankrate-20040515a2">{{cite web | title = Warning signs of a bad home loan (Page 2 of 2) | url=http://www.bankrate.com/brm/news/mortgages/20040615a2.asp | accessdate=2008-05-19 | year = 2008 }}</ref> 9% in 1996,<ref name = "NPR-Brace">{{cite web | title = NPR: Economists Brace for Worsening Subprime Crisis | url=http://www.npr.org/templates/story/story.php?storyId=12561184 | accessdate=2008-05-19 | year = 2008 }}</ref> 13% ($160 billion) in 1999,<ref name = "bankrate-20040515a2"/> and 20% ($600 billion) in 2006.<ref name = "NPR-Brace"/><ref>{{cite web|url=http://www.federalreserve.gov/newsevents/speech/bernanke20080314a.htm|title=FRB: Speech-Bernanke, Fostering Sustainable Homeownership-14 March 2008<!-- Bot generated title -->}}</ref><ref>{{cite web|url=http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all|title= Fannie Mae Eases Credit To Aid Mortgage Lending|publisher=New York Times|date=1999-09-30}}</ref> A study by the Federal Reserve indicated that the average difference in mortgage interest rates between subprime and prime mortgages (the "subprime markup" or "risk premium") declined from 2.8 percentage points (280 basis points) in 2001, to 1.3 percentage points in 2007. In other words, the risk premium required by lenders to offer a subprime loan declined. This occurred even though subprime borrower and loan characteristics declined overall during the 2001–2006 period, which should have had the opposite effect. The combination is common to classic boom and bust credit cycles.<ref name = "ssrn.com-1020396"> |
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{{cite web |
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| url = http://ssrn.com/abstract=1020396 |
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| title = Understanding the Subprime Mortgage Crisis |
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| last = Demyanyk |
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| first = Yuliya |
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| coauthors = Van Hemert, Otto |
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| date = 2008-08-19 |
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| publisher = [[SSRN|Social Science Electronic Publishing]] |
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| work = Working Paper Series |
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| accessdate = 2008-09-18 |
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}}</ref> |
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In addition to considering higher-risk borrowers, lenders have offered increasingly high-risk loan options and incentives. These high risk loans included the "No Income, No Job and no Assets" loans, sometimes referred to as [[Ninja loans]]. |
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Another example is the interest-only adjustable-rate mortgage (ARM), which allows the homeowner to pay just the interest (not principal) during an initial period. Still another is a "payment option" loan, in which the homeowner can pay a variable amount, but any interest not paid is added to the principal. Further, an estimated one-third of ARM originated between 2004 and 2006 had "teaser" rates below 4%, which then increased significantly after some initial period, as much as doubling the monthly payment.<ref>{{cite web | title = NPR: Economists Brace for Worsening Subprime Crisis | url=http://www.npr.org/templates/story/story.php?storyId=12561184 NPR Article | accessdate=2008-05-19 | year = 2008 }}</ref> |
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The Center for Responsible Lending, in its report on IndyMac, related testimony that the bank actually made efforts to '''avoid''' having income information about some borrowers.<ref>{{cite web|url=http://www.responsiblelending.org/pdfs/indymac_what_went_wrong.pdf|title=IndyMac: What Went Wrong|format=PDF}}</ref> The Associated Press has reported that a federal grand jury is investigating subprime lenders Countrywide Financial Corp., New Century Financial Corp. and IndyMac Bancorp Inc. and reports also that the FBI is investigating IndyMac for possible fraud.<ref>{{cite web|url=http://www.cbsnews.com/stories/2008/07/25/national/main4292140.shtml|title=Grand Jury Investigating SubPrime Lenders}}</ref> The question, then, is whether banks and other private mortgage originators of subprime and other "nonprime" loans might deliberately have profited or attempted to profit - in moneys, economic benefit or even fraudulent gain - through reducing the amount of information they collected from borrowers. |
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Judge Leslie Tchaikovsky of the U.S. Bankruptcy Court for the Northern District of California, found on 25 May 2008 that even though a pair of borrowers had, indeed, misrepresented their incomes on a "stated income" home equity loan, National City Bank's "reliance" on these statements of income "was not reasonable based on an objective standard".<ref>{{cite web|url=http://calculatedrisk.blogspot.com/2008/05/bk-judge-rules-stated-income-heloc-debt.html|title=Judge Rules Stated Income HELOC Debt Dischargeable}}</ref> |
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The banking industry provided home loans even to [[Illegal immigration to the United States|undocumented immigrants]].<ref>[http://money.cnn.com/2005/08/08/news/economy/illegal_immigrants/ Banks help illegal immigrants own their own home], CNN/Money, August 8, 2005</ref><ref>[http://www.toprealtynews.com/realestatenews/residental_property/id_30896/ Mortgages for Illegal Immigrants Becoming More Common], November 21, 2006</ref><ref>[http://www.cnsnews.com/public/content/article.aspx?RsrcID=36208 Illegal Immigration and the Mortgage Mess], CNSNews.com, September 24, 2008</ref> It is legal for illegal immigrants to purchase property in the United States. The pro-immigrant experts like Tim Ready at the [[University of Notre Dame]] argued that "It's really important to the economy as a whole and to the real estate market in particular that Latinos be able to purchase a home."<ref>[http://www.businessweek.com/the_thread/hotproperty/archives/2007/07/mortgages_for_i.html Mortgages for illegal immigrants], BusinessWeek, July 30, 2007</ref> Banks, including some major institutions, offered home-mortgage loans to people who don't have [[Social Security number]]s.<ref>[http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2006/06/15/MNGRMJEGM81.DTL Selling illegal immigrants the American dream], San Francisco Chronicle, June 15, 2006</ref> |
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===Securitization practices === |
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[[Image:Borrowing Under a Securitization Structure.gif|thumb|Borrowing under a securitization structure.]] |
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[[Securitization]] is a [[structured finance]] process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as [[collateral]] for third-party investment.<ref name="black">Black's Law Dictionary (7th ed)</ref> There are many parties involved. Due to securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others. Asset securitization began with the structured financing of mortgage pools in the 1970s.<ref>{{cite web |title= Asset Securitization Comptroller’s Handbook |url=http://www.dallasfed.org/news/ca/2005/05wallstreet_assets.pdf |date= November 1997 |publisher= US Comptroller of the Currency |
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Administrator of National Banks}}</ref> |
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The traditional mortgage model involved a bank originating a loan to the borrower/homeowner and retaining credit (default) risk. With the advent of securitization, the traditional model has given way to the "originate to distribute" model, in which the credit risk is transferred (distributed) to investors. The securitized share of subprime mortgages (i.e., those passed to third-party investors) increased from 54% in 2001, to 75% in 2006.<ref name = "ssrn.com-1020396"/> [[Alan Greenspan]] stated that the securitization of home loans for people with poor credit — not the loans themselves — was to blame for the current global credit crisis.<ref>{{cite web | title = Greenspan sees signs of credit crisis easing - Stocks & economy - MSNBC.com | url=http://www.msnbc.msn.com/id/21097872/ | accessdate=2008-05-19 | year = 2008 }}</ref> |
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Some believe that mortgage standards became lax because of a [[moral hazard]], where each link in the mortgage chain collected profits while believing it was passing on risk.<ref>{{cite news | title='Moral hazard' helps shape mortgage mess |
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| first=Holden | last=Lewis | publisher= Bankrate.com | |url=http://www.bankrate.com/brm/news/mortgages/20070418_subprime_mortgage_morality_a1.asp?caret=3c | date=18 April 2007}}</ref> |
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=== Inaccurate credit ratings === |
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{{further|[[Role of credit rating agencies in the subprime crisis]]}} |
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[[Image:MBS Downgrades Chart.png|thumb|MBS credit rating downgrades, by quarter.]] |
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[[Credit rating agencies]] are now under scrutiny for giving investment-grade ratings to [[securitization]] transactions (CDOs and MBSs) based on subprime mortgage loans. These high ratings encouraged the flow of investor funds into these securities, helping finance the housing boom. Higher ratings were believed justified by various credit enhancements including overcollateralization (pledging collateral in excess of debt issued), credit default insurance, and equity investors willing to bear the first losses. Critics claim that conflicts of interest were involved, as rating agencies are paid by the firms that organize and sell the debt to investors, such as investment banks.<ref>{{cite web|url=http://www.economist.com/finance/displaystory.cfm?story_id=9769471|title=Buttonwood | Credit and blame | Economist.com<!-- Bot generated title -->}}</ref> On 11 June 2008 the [[U.S. Securities and Exchange Commission]] proposed far-reaching rules designed to address perceived conflicts of interest between rating agencies and issuers of structured securities.<ref>{{cite web | title = SEC Proposes Comprehensive Reforms to Bring Increased Transparency to Credit Rating Process | U.S. Securities and Exchange Commission | url=http://www.sec.gov/news/press/2008/2008-110.htm | accessdate=2008-07-2008 | year = 2008}}</ref> |
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Rating agencies lowered the credit ratings on $1.9 trillion in mortgage backed securities from Q3 2007 to Q2 2008. This places additional pressure on financial institutions to lower the value of their MBS. In turn, this may require these institutions to acquire additional capital, to maintain capital ratios. If this involves the sale of new shares of stock, the value of existing shares is reduced. In other words, ratings downgrades pressure MBS and stock prices lower.<ref>{{cite web|url=http://money.cnn.com/2008/08/04/magazines/fortune/whitney_feature.fortune/index.htm|title=Fortune Article}}</ref> |
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===Mortgage fraud=== |
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[[Image:Mortgage loan fraud.png|thumb|[[Mortgage fraud]] by borrowers from US Department of the Treasury.<ref name="Fincen-MortgageLoanFraud">{{cite web|url=http://www.fincen.gov/MortgageLoanFraud.pdf|title=Reported Suspicious Activities<!-- Bot generated title -->|format=PDF}}</ref>]] |
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Misrepresentation of loan application data and mortgage fraud are other contributing factors.<ref>{{cite web|url=http://www.nytimes.com/2008/01/13/business/13view.html?_r=2&scp=1&sq=Tyler+Cowen&oref=login&oref=slogin|title=So We Thought. But Then Again . . . - New York Times<!-- Bot generated title -->}}</ref> US Department of the Treasury [[suspicious activity report]] of [[mortgage fraud]] increased by 1,411% between 1997 and 2005.<ref name="Fincen-MortgageLoanFraud"/> |
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===Flawed oversight by mortgage brokers=== |
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According to a study by Wholesale Access Mortgage Research & Consulting Inc., in 2004 Mortgage brokers originated 68% of all residential loans in the U.S., with subprime and [[Alt-A]] loans accounting for 42.7% of brokerages' total production volume.<ref>{{cite web |title=New Research About Mortgage Brokers Published |url=http://www.wholesaleaccess.com/7_28_mbkr.shtml |accessdate=2008-05-19 |year=2008 }}</ref> |
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The chairman of the Mortgage Bankers Association claimed brokers profited from a home loan boom but did not do enough to examine whether borrowers could repay.<ref>{{cite web | title = Brokers, bankers play subprime blame game - Real estate - MSNBC.com | url=http://www.msnbc.msn.com/id/18804054/ | accessdate=2008-05-19 | year = 2008 }}</ref> |
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===Excessive underwriting of high-risk mortgages=== |
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Underwriters (working for the actual banks who lend the money, not mortgage brokers) determine if the risk of lending to a particular borrower under certain parameters is acceptable. Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral. See [[mortgage underwriting]]. |
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In 2007, 40% of all subprime loans were generated by automated underwriting.<ref>{{cite news |author=Lynnley Browning |title=The Subprime Loan Machine |url=http://www.nytimes.com/2007/03/23/business/23speed.html?_r=1&partner=rssnyt&emc=rss&oref=slogin |work=nytimes.com |publisher= Arthur Ochs Sulzberger, Jr.|location=New York City |date=2007-03-27 |accessdate=2008-07-13 }}</ref> |
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An Executive vice president of Countrywide Home Loans Inc. stated in 2004 "Prior to automating the process, getting an answer from an underwriter took up to a week. We are able to produce a decision inside of 30 seconds today. ... And previously, every mortgage required a standard set of full documentation."<ref>{{cite web | title = Bank Systems & Technology | url=http://www.banktech.com/story/featured/showArticle.jhtml?articleID=21401117 | accessdate=2008-05-19 | year = 2008 }}</ref> |
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Some think that users whose lax controls and willingness to rely on shortcuts led them to approve borrowers that under a less-automated system would never have made the cut are at fault for the subprime meltdown.<ref>{{cite web | title = REALTOR Magazine-Daily News-Are Computers to Blame for Bad Lending? | url=http://www.realtor.org/rmodaily.nsf/f3c66d0c6457c1e1862570af000cb13b/b187c47b7d488dd8862572a7004ec179?OpenDocument | accessdate=2008-05-19 | year = 2008 }}</ref> |
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===Government policies=== |
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Several critics have commented that the current regulatory framework is outdated. President [[George W. Bush]] stated in September 2008: "Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we've seen how one company can grow so large that its failure jeopardizes the entire financial system."<ref>{{cite web|url=http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html|title=President's Address to the Nation September 2008}}</ref> The [[Securities and Exchange Commission]] (SEC) has conceded that self-regulation of investment banks contributed to the crisis.<ref>{{cite web|url=http://www.nytimes.com/2008/09/27/business/27sec.html?em|title=SEC Concedes Oversight Flaws}}</ref><ref>{{cite web|url=http://www.nytimes.com/2008/10/03/business/03sec.html?em|title=The Reckoning}}</ref> |
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Economist [[Robert Kuttner]] has criticized the repeal of the [[Glass-Steagall Act]] by the [[Gramm-Leach-Bliley Act]] of 1999 as possibly contributing to the subprime meltdown, although other economists disagree.<ref>{{cite web | title = The Bubble Economy | The American Prospect | url=http://www.prospect.org/cs/articles?article=the_bubble_economy | accessdate=2008-05-19 | year = 2008 }}</ref><ref>{{cite web | title = Did the Gramm-Leach-Bliley Act cause the housing bubble? | url=http://www.marginalrevolution.com/marginalrevolution/2008/09/did-the-gramm-l.html | accessdate=2008-09-28 }}</ref> A taxpayer-funded government bailout related to mortgages during the [[savings and loan crisis]] may have created a [[moral hazard]] and acted as encouragement to lenders to make similar higher risk loans.<ref>{{cite news|url=http://www.npr.org/templates/story/story.php?storyId=16734629| title=Subprime Bailout: Good Idea or 'Moral Hazard|first=Eric |last=Weiner|date=29 November 2007|publisher=NPR.org}}</ref> Additionally, there is debate among economists regarding the effect of the [[Community Reinvestment Act]], with detractors claiming it encourages lending to uncreditworthy consumers<ref>{{cite web |
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|first=Robert |last=England |
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|title=Assault on the Mortgage Lenders |
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|url=http://findarticles.com/p/articles/mi_m1282/is_/ai_14779796 |
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|publisher=''[[National Review]]'' |
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|date=December 27, 1993 }}</ref><ref>{{cite web |
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|first=Howard |last=Husock |
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|title=The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities |
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|url=http://www.city-journal.org/html/10_1_the_trillion_dollar.html |
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|publisher=''[[City Journal]]'' |
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|date=January 01, 2000 }}</ref><ref name=DiLorenzo>[[Thomas J. DiLorenzo]], [http://www.lewrockwell.com/dilorenzo/dilorenzo125.html The Government-Created Subprime Mortgage Meltdown], [[LewRockwell.com]], September 6, 2007 ''accessdate=2007-12-07''</ref><ref>{{cite web |
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| title=The Real Scandal - How feds invited the mortgage mess |
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| url=http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm?page=0 |
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| first=Stan |last=Liebowitz |
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| publisher=''[[New York Post]]''}}</ref> and defenders claiming a thirty year history of lending without increased risk.<ref>{{cite web |title=Did Liberals Cause the Sub-Prime Crisis? |
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|url=http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis |
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|first=Robert |last=Gordon |
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|publisher=''[[The American Prospect]]''}}</ref><ref>{{cite web |title=No, Larry, CRA Didn’t Cause the Sub-Prime Mess |
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|url=http://www.newamerica.net/blog/asset-building/2008/no-larry-cra-didn-t-cause-sub-prime-mess-3210 |
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|first=Ellen |last=Seidman |
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|publisher=''[[New American Foundation]]''}}</ref><ref>{{cite web |title=Prepared Testimony of Michael S. Barr |
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|url=http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf |
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|first=Michael |last=Barr |
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|publisher=''[[U.S. House of Representatives]]''}}</ref><ref name="Ellis">{{cite journal|last=Ellis |first=Luci |title=The housing meltdown: Why did it happen in the United States? |journal=BIS Working Papers|issue=259|pages=5|url=http://www.bis.org/publ/work259.pdf?noframes=1}}</ref> Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of home loans to otherwise unqualified low-income borrowers and also allowed for the first time the securitization of CRA-regulated loans containing subprime mortgages.<ref>{{cite web |title=Congress Tries To Fix What It Broke |
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|url=http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=306544845091102 |
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|date=9/17/2008 |
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|publisher=''[[Investor's Business Daily]]''}}</ref><ref>{{cite web |title=Ride out Wall Street's hurricane - The real reasons we're in this mess – and how to clean it up |
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|url=http://www.csmonitor.com/2008/0917/p09s01-coop.html |
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|first=Mark |last=Skousen |
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|date=9/17/2008|publisher=''[[Christian Science Monitor]]'' |
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}}</ref> A study by a legal firm which counsels financial services entities on Community Reinvestment Act compliance found that CRA-covered institutions were less likely to make subprime loans, and when they did the interest rates were lower. The banks were half as likely to resell the loans to other parties.<ref>{{cite web |
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|url=http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf |
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|title=The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis |
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|Publisher=Traiger & Hinkley LLP |
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|date=1/7/2008 |
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}}</ref> |
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Some have argued that, despite attempts by various U.S. states to prevent the growth of a secondary market in repackaged [[predatory loan]]s, the [[Treasury Department]]'s [[Office of the Comptroller of the Currency]], at the insistence of national banks, struck down such attempts as violations of Federal banking laws.<ref>{{cite web |
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| url=http://www.slate.com/id/2182709/pagenum/all |
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| title=Crashing the Subprime Party: How the feds stopped the states from averting the lending mess. |
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| first=Nicholas |
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| last=Bagley |
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| publisher=Slate |
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| date=2008-01-24}}</ref> |
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The [[U.S. Department of Housing and Urban Development]]'s mortgage policies fueled the trend towards issuing risky loans.<ref>{{cite news|url=http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html| title=How HUD Mortgage Policy Fed The Crisis|first=Carol D. |last=Leonnig|date= June 10, 2008|publisher=[[Washington Post]]}}</ref><ref>{{cite web|url=http://biz.yahoo.com/ibd/080915/issues01.html?.v=1|title=The Real Culprits In This Meltdown}}</ref> In 1995, Fannie Mae and Freddie Mac began receiving affordable housing credit for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.<ref>{{cite web|url=http://www.washingtonpost.com/wp-dyn/content/graphic/2008/06/10/GR2008061000059.html|title=www.washingtonpost.com/wp-dyn/content/graphic/2008/06/10/GR2008061000059.html<!--INSERT TITLE-->}}</ref> Subprime mortgage loan originations surged by 25% per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years.<ref>{{cite news| url=http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi.html| title= |
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U.S. Home Prices: Does Bust Always Follow Boom?||date= February 10, 2005 (revised April 8, 2005)|publisher=[[Federal Deposit Insurance Corporation]]}}</ref> As of November 2007 Fannie Mae held a total of $55.9 billion of subprime securities and $324.7 billion of Alt-A securities in their portfolios.<ref>{{cite web|url=http://www.fanniemae.com/ir/pdf/earnings/2007/credit_supplement.pdf|title=www.fanniemae.com/ir/pdf/earnings/2007/credit_supplement.pdf<!--INSERT TITLE-->|format=PDF}}</ref> As of the 2008Q2 Freddie Mac had $190 billion in Alt-A mortgages. Together they have more than half of the $1 trillion of Alt-A mortgages.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601109&refer=news&sid=arb3xM3SHBVk|title=www.bloomberg.com/apps/news?pid=20601109&refer=news&sid=arb3xM3SHBVk<!--INSERT TITLE-->}}</ref> The growth in the subprime mortgage market, which included B, C and D paper bought by private investors such as hedge funds, fed a housing bubble that later burst. |
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A September 30, 1999 [[New York Times]] article stated, "... the Fannie Mae Corporation is easing the credit requirements on loans... The action... will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough... Fannie Mae... has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people... borrowers whose incomes, credit ratings and savings are not good enough... Fannie Mae is taking on significantly more risk... the government-subsidized corporation may run into trouble... prompting a government rescue... the move is intended in part to increase the number of... home owners who tend to have worse credit ratings..." <ref>[http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=all Fannie Mae Eases Credit To Aid Mortgage Lending], The New York Times, September 30, 1999</ref> |
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On September 10, 2003, U.S. Congressman [[Ron Paul]] gave a speech to Congress where he said that the then current government policies encouraged lending to people who couldn't afford to pay the money back, and he predicted that this would lead to a bailout, and he introduced a bill to abolish these policies. <ref>[http://www.lewrockwell.com/paul/paul128.html Ron Paul in the House Financial Services Committee, September 10, 2003]</ref> |
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===Conflict of interest=== |
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Gerald P. O'Driscoll former vice president at the [[Federal Reserve Bank of Dallas]] stated that [[Fannie Mae]] and [[Freddie Mac]] had become classic examples of [[crony capitalism]]. Government backing let Fannie and Freddie dominate the mortgage-underwriting. "The politicians created the mortgage giants, which then returned some of the profits to the pols - sometimes directly, as campaign funds; sometimes as "contributions" to favored constituents."<ref>Gerald P. O'Driscoll, Jr., [http://www.nypost.com/seven/09092008/postopinion/opedcolumnists/fannie_freddie_bailout_baloney_128135.htm Fannie/Freddie Bailout Baloney], [[New York Post]], September 9, 2008.</ref> |
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On April 18, 2006 home loan giant Freddie Mac was fined $3.8 million, by far the largest amount ever assessed by the Federal Election Commission, as a result of illegal campaign contributions. Much of the illegal fund raising benefited members of the [[United States House Committee on Financial Services]], a panel whose decisions can affect Freddie Mac.<ref>{{cite web|url=http://www.msnbc.msn.com/id/12373488/from/RSS/]|title=www.msnbc.msn.com/id/12373488/from/RSS/]<!--INSERT TITLE-->}}</ref> |
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Some lawmakers received favorable treatment from financial institutions involved in the subprime industry. (See [[Countrywide financial political loan scandal]]). In June 2008 [[Conde Nast Portfolio]] reported that numerous Washington, DC politicians over recent years had received mortgage financing at noncompetitive rates at [[Countrywide Financial]] because the corporation considered for the officeholders under a program called "FOA's"--"Friends of Angelo". Angelo being Countrywide's Chief Executive [[Angelo Mozilo]].<ref>{{cite web|url=http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf|title=banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf<!--INSERT TITLE-->|format=PDF}}</ref> |
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On 18 June 2008, a Congressional ethics panel started examining allegations that chairman of the [[Senate Banking Committee]], [[Christopher Dodd]] (D-CT), and the chairman of the [[Senate Budget Committee]], [[Kent Conrad]] (D-ND) received preferential loans by troubled mortgage lender [[Countrywide Financial Corp]].<ref name="reuters1">{{cite web|url=http://www.reuters.com/article/politicsNews/idUSWAT00970120080619|title=Ethics panel examines lawmakers' Countrywide loans | Politics | Reuters<!-- Bot generated title -->}}</ref> Two former CEO of [[Fannie Mae]] [[Franklin Raines]] and [[James A. Johnson (businessman)|James A. Johnson]] also received preferential loans from the troubled mortgage lender. Fannie Mae was the biggest buyer of Countrywide's mortgages.<ref>{{cite web|url=http://online.wsj.com/article/SB121279970984353933.html?loc=interstitialskip|title=Countrywide Friends Got Good Loans - WSJ.com}}</ref> |
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=== Policies of central banks === |
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[[Central bank]]s are primarily concerned with managing monetary policy, they are less concerned with avoiding asset bubbles, such as the [[housing bubble]] and [[dot-com bubble]]. Central banks have generally chosen to react after such bubbles burst to minimize collateral impact on the economy, rather than trying to avoid the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to properly deflate it are a matter of debate among economists.<ref name="WallStreetJournal">{{cite web | title = The Wall Street Journal Online - Featured Article | url=http://opinionjournal.com/editorial/feature.html?id=110010981 | accessdate=2008-05-19 | year = 2008 }}</ref><ref>{{cite web | title = Assets and their liabilities | Economist.com | url=http://www.economist.com/specialreports/displaystory.cfm?story_id=9972549 | accessdate=2008-05-19 | year = 2008 }}</ref> |
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[[Federal Reserve]] actions raised concerns among some market observers that it could create a [[moral hazard]]. Some industry officials said that [[Federal Reserve Bank of New York]] involvement in the rescue of [[Long-Term Capital Management]] in 1998 would encourage large financial institutions to assume more risk, in the belief that the Federal Reserve would intervene on their behalf.<ref>{{cite web |
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| url= http://www.gao.gov/archive/2000/gg00067r.pdf |
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| title= Responses to Questions Concerning Long-Term Capital Management and Related Events |
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| accessdate=2008-07-13 |
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| author= Thomas J. McCool |
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| date= 2000-02-23 |
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| format= PDF |
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| work= General Government Division |
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| publisher= [[Government Accountability Office]] }}</ref> |
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A contributing factor to the rise in home prices was the lowering of interest rates earlier in the decade by the Federal Reserve, to diminish the blow of the collapse of the [[dot-com bubble]] and combat the risk of deflation.<ref name="WallStreetJournal" /> From 2000 to 2003, the Federal Reserve lowered the [[federal funds rate]] target from 6.5% to 1.0%.<ref>{{cite web | title = Federal Reserve Board: Monetary Policy and Open Market Operations | url=http://www.federalreserve.gov/fomc/fundsrate.htm | accessdate=2008-05-19}}</ref> The central bank believed that interest rates could be lowered safely primarily because the rate of [[inflation]] was low and disregarded other important factors. The Federal Reserve's inflation figures, however, were flawed{{fix|link=Wikipedia:Contents|text=citation needed}}. Richard W. Fisher, President and CEO of the [[Federal Reserve Bank of Dallas]], stated that the Federal Reserve's interest rate policy during this time period was misguided by this erroneously low inflation data, thus contributing to the housing bubble.<ref>{{cite web | author = Richard W. Fisher | title = Confessions of a Data Dependent: Remarks before the New York Association for Business Economics | date = 2006-11-02 | url = http://dallasfed.org/news/speeches/fisher/2006/fs061102.cfm | accessdate=2008-07-13}}</ref> |
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== Impacts and downturns in financial markets, 2007–2008== |
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{{Main|Financial crisis of 2007-2008}} |
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=== Financial sector downturn === |
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{{see also|Subprime crisis background information|Subprime crisis impact timeline|List of writedowns due to subprime crisis|List of bankrupt or acquired banks during the subprime mortgage crisis}} |
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[[Image:FDIC Bank Profits - Q1 Profile.png|thumb|FDIC Graph - U.S. Bank & Thrift Profitability By Quarter]] |
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Many financial institutions had made enormous investments based on the expected continuation of housing price appreciation. As housing prices declined, the value of the [[mortgage-backed securities]] (MBS) representing these investments declined and became uncertain. Due to [[financial leverage]], what had magnified profits during the housing boom period now drove large losses after the bust. Financial institutions and investors holding MBS suffered significant losses as a result of widespread and increasing mortgage payment defaults or mortgage asset devaluation beginning in 2007 onward. [[Financial institutions]] from around the world have recognized subprime-related losses and [[write down| write-downs]] exceeding U.S. $501 billion as of August 2008.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=a8sW0n1Cs1tY&refer=home|title=www.bloomberg.com/apps/news?pid=20601087&sid=a8sW0n1Cs1tY&refer=home<!--INSERT TITLE-->}}</ref> |
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A SEC regulatory ruling in 2004 greatly contributed to US Investment Banks ability to leverage their balance sheets. In exchange for an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on the SEC would obtain greater oversight in the investment activities of the banks. The SEC decided to use the firms' own computer models for determining the riskiness of investments, but then did little to followup on the risky activities that their examiners uncovered.<ref>{{cite web|url=http://www.nytimes.com/2008/10/03/business/03sec.html|title=Agency’s ’04 Rule Let Banks Pile Up New Debt, and Risk}}</ref> |
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Profits at the 8,533 U.S. banks insured by the [[FDIC]] declined from $35.2 billion to $646 million (89%) during the fourth quarter of 2007 versus the prior year, due to soaring loan defaults and provisions for loan losses. It was the worst bank and thrift quarterly performance since 1990. For all of 2007, these banks earned approximately $100 billion, down 31% from a record profit of $145 billion in 2006. Profits declined from $35.6 billion to $19.3 billion during the first quarter of 2008 versus the prior year, a decline of 46%.<ref>{{cite web|url=http://www4.fdic.gov/qbp/2008mar/qbp.pdf|title=FDIC Quarterly Profile Q1 08|format=PDF}}</ref><ref>{{cite web|url=http://www4.fdic.gov/qbp/2007dec/qbp.pdf|title=FDIC Profile FY 2007 Pre-Adjustment|format=PDF}}</ref> |
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The financial sector began to feel the consequences of this crisis in February 2007 with the $10.5 billion writedown of [[HSBC]], which was the first major CDO or MBO related loss to be reported.<ref>{{cite web|url=http://news.bbc.co.uk/2/hi/business/7096845.stm|title=news.bbc.co.uk/2/hi/business/7096845.stm<!--INSERT TITLE-->}}</ref> During 2007, at least 100 [[mortgage]] companies either shut down, suspended operations or were sold.<ref name="bloomberg1">{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=aTARUhP3w5xE&refer=home|title=Bloomberg.com: Worldwide}}</ref> |
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Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup were forced to resign within a week of each other.<ref>{{cite news | title = Prince out as Citigroup CEO; more writedowns disclosed - Nov. 4, 2007 | url=http://money.cnn.com/2007/11/04/news/companies/citigroup_prince/index.htm | accessdate=2008-05-19 | year = 2008 }}</ref> Various institutions follow-up with merger deals.<ref> |
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{{cite web|url=http://www.reuters.com/article/ousiv/idUSN1128267820080111|title=Similar deals expected to follow Countrywide sale|date=2008-01-11|accessdate=2008-05-19|work=Mark McSherry|publisher=Reuters}}</ref> |
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===Market weaknesses, 2007=== |
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On July 19, 2007, the [[Dow Jones Industrial Average]] hit a record high, closing above 14,000 for the first time.<ref>{{cite news | title = Finally! Dow finishes above 14,000 - Jul. 19, 2007 | url=http://money.cnn.com/2007/07/19/markets/markets_530/index.htm | accessdate=2008-05-19 | year = 2008 }}</ref> |
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On August 15, 2007, the Dow dropped below 13,000 and the [[S&P 500]] crossed into negative territory for that year. Similar drops occurred in virtually every market in the world, with Brazil and Korea being hard-hit. Through 2008, large daily drops became common, with, for example, the [[KOSPI]] dropping about 7% in one day,<ref>{{cite web | title = National, World and Business News | Reuters.com | url=http://today.reuters.com/news/articlenews.aspx?type=businessNews&storyid=2007-08-16T052720Z_01_HKG37478_RTRUKOC_0_US-MARKETS-GLOBAL.xml | accessdate=2008-02-24 | year = 2008 }}</ref>{{Dead link|date=May 2008}} although 2007's largest daily drop by the S&P 500 in the U.S. was in February, a result of the subprime crisis. |
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Mortgage lenders<ref>{{cite web |title=Yahoo! - 404 Not Found |url=http://biz.yahoo.com/ap/070803/rait_financial_mover.html |accessdate=2008-02-24 |year=2008}}</ref>{{Dead link|date=May 2008}}<ref>{{cite web |title=Thornburg says no bankruptcy as shares sink |
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| Markets |
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| Markets News |
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| Reuters |
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| url=http://www.reuters.com/article/marketsNews/idUKN1444576220070814 | accessdate=2008-05-19 | year = 2008 }}</ref> and home builders<ref>{{cite news |title=Housing starts, building permits both at 10-year low - Aug. 16, 2007 |url=http://money.cnn.com/2007/08/16/news/economy/housing_starts/index.htm |accessdate=2008-05-19 |year=2008 }}</ref><ref>{{cite web |title=Yahoo! - 404 Not Found | url=http://biz.yahoo.com/ap/070813/sector_wrap_homebuilders.html | accessdate=2008-02-24 | year = 2008 }}</ref>{{Dead link|date=May 2008}} fared terribly, but losses cut across sectors, with some of |
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the worst-hit industries, such as metals & mining companies, having |
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only the vaguest connection with lending or mortgages.<ref>{{cite web |title=Mining, metals companies hammered on debt jitters, M&A; chill - MarketWatch |
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|url=http://www.marketwatch.com/news/story/mining-metals-companies-hammered-debt/story.aspx?guid=%7BD66D3B3A%2D1EC0%2D438C%2DA51D%2DE3176CFEA31A%7D |accessdate=2008-05-19 |year=2008}}</ref> |
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Stock indices worldwide trended downward for several months since the first panic in July–August 2007. |
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===Market downturns and impacts, 2008=== |
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The crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into [[commodities]] as "stores of value".<ref>{{cite web|url=http://news.bbc.co.uk/1/hi/world/7284196.stm|title=The cost of food: Facts and figures}}</ref> Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the [[2007–2008 world food price crisis|world food price crisis]] and [[Oil price increases since 2003|oil price increases]] due to a "commodities super-cycle."<ref>{{cite web|url=http://news.xinhuanet.com/english/2008-06/09/content_8334426.htm|title=Speculation is pushing up oil prices}}</ref><ref>{{cite web|url=http://www.sundayherald.com/news/heraldnews/display.var.2104855.0.mother_of_all_bubbles_prepares_to_burst.php|title=Mother of all bubbles prepares to burst}}</ref> Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials.<ref name='NS'>{{cite news | first= | last= | coauthors= | title=The trading frenzy that sent prices soaring | date= | publisher= | url =http://www.newstatesman.com/200804170026 | work =[[New Statesman]] | pages = | accessdate = 2008-04-28 | language = }}</ref> |
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Beginning in mid-2008, all three major stock indices in the United States (the Dow Jones Industrial Average, NASDAQ, and the S&P 500) entered a [[bear market]]. On 15 September 2008, a slew of financial concerns caused the indices to drop by their sharpest amounts since the 2001 terrorist attacks. That day, the most noteworthy trigger was the declared bankruptcy of investment bank [[Lehman Brothers]]. Additionally, Merrill Lynch was joined with Bank of America in a forced merger worth $50 billion. Finally, concerns over insurer [[American International Group]]'s ability to stay capitalized caused that stock to drop over 60% that day. Poor economic data on manufacturing contributed to the day's panic, but were eclipsed by the severe developments of the financial crisis. All of these events culminated into a stock selloff that was experienced worldwide. Overall, the Dow Jones Industrial plunged 504 points (4.4%) while the S&P 500 fell 59 points (4.7%). Asian and European markets rendered similarly sharp drops. |
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The much anticipated passage of the $700 billion [[Proposed bailout of U.S. financial system (2008)|bailout plan]] was struck down by the House of Representatives in a 228–205 vote on September 29. In the context of recent history, the result was catastrophic for stocks. The Dow Jones Industrial Average suffered a severe 777 point loss (7.0%), its worst point loss on record up to that date. The NASDAQ tumbled 9.1% and the S&P 500 fell 8.8%, both of which were the worst losses those indices experienced since the 1987 stock market crash. |
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Despite congressional passage of historic bailout legislation, which was signed by President Bush on Saturday, Oct. 4, Dow Jones Index tumbled further when markets resumed trading on Oct. 6. The Dow fell below 10,000 points for the first time in almost four years, losing 800 points before recovering to settle at -369.88 for the day. <ref>{{cite web|url=http://www.foxnews.com/story/0,2933,433623,00.html |title=Dow Makes Late-Day Comeback but Finishes Below 10,000 for First Time Since 2004}} Fox News </ref> Stocks also continued to tumble to record lows ending one of the worst weeks in the Stock Market since September 11, 2001."<ref>CNN Money. {{cite web|url=http://money.cnn.com/2008/10/06/markets/markets_newyork/index.htm?postversion=2008100610 |title=Dow falls below 10,000}} CNN.</ref> |
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It is also estimated that even with the passing of the so-called bailout package, many banks within the United States will tumble and therefore cease operating. It is estimated that over 100 banks in the United States will close it doors because of the financial crisis. This will have a severe impact on the economy and the consumers. As a result of the crisis it is expected that it will take years for the United States to recover from such a mess.."<ref>CNN Money. {{cite web|url=http://www.cnn.com/2008/US/10/05/shaky.banks.ap/index.html |title=U.S. bank failures almost certain to increase in next year}} CNN.</ref> |
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==Other economic effects == |
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{{see also|Subprime mortgage crisis - Other economic effects}} |
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The subprime crisis had a series of other economic effects. Housing price declines left consumers with less wealth, which placed downward pressure on consumption.<ref>{{cite web|url=http://money.cnn.com/2008/06/05/news/economy/fundflows/index.htm|title=Net worth article}}</ref> Certain minority groups received a higher proportion of subprime loans and experienced a disproportional level of foreclosures.<ref name="nytimes">{{cite web|url=http://www.nytimes.com/2007/10/15/nyregion/15subprime.html?ex=1350187200&en=a9978e04a9864642&ei=5088&partner=rssnyt&emc=rss|title=Study Finds Disparities in Mortgages by Race|publisher=[[The New York Times]]|author=Manny Fernandez|date=15 October 2007|accessdate=2008-05-19}}</ref><ref name="USAtoday-minorities">{{cite web | title = Minorities hit hard by rising costs of subprime loans - USATODAY.com | url=http://www.usatoday.com/money/economy/housing/2007-04-25-subprime-minorities-usat_N.htm | accessdate=2008-05-19 | year = 2008 }}</ref> Home related crimes including arson increased.<ref>{{cite news | title=Will foreclosures spark an arson boom?| date= 10 January 2008| publisher= Fortune | url=http://money.cnn.com/2008/01/09/news/economy/birger_arson.fortune/ |first=Jon |last=Birger }}</ref> Job losses in the financial sector were significant, with over 65,400 jobs lost in the United States as of September 2008.<ref>{{cite web|url=http://money.cnn.com/2008/09/15/news/companies/lehman_jobs/index.htm?postversion=2008091513|title=money.cnn.com/2008/09/15/news/companies/lehman_jobs/index.htm?postversion=2008091513<!--INSERT TITLE-->}}</ref> |
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Many [[renting|renters]] became innocent victims, often [[eviction|evicted]] from their homes without notice due to foreclosure of their [[landlord]]'s property.<ref>{{Cite news |
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| title = Out without warning |
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| author = Jamie Smith Hopkins |
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| work = [[The Baltimore Sun]] |
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| publisher =Timothy E Ryan |
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| accessdate=2008-05-19 |
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| date = [[2008-05-15]] |
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| url =http://www.baltimoresun.com/business/realestate/bal-te.bz.renters15may15,0,3018433.story}}</ref> In October 2008, [[Tom Dart]], the elected Sheriff of [[Cook County, Illinois]], criticized mortgage companies for their actions, and announced that he was suspending all foreclosure evictions.<ref>[http://www.cnn.com/2008/US/10/08/chicago.evictions/index.html "Illinois sheriff: No foreclosure evictions on my watch",] [[CNN]], October 8, 2008</ref> |
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The sudden lack of credit is also hurting car sales. [[Ford]] sales in October 2008 were down 33.8% from a year ago, [[General Motors]] sales were down 15.6%, and [[Toyota]] sales had declined 32.3%. One in five car dealerships are expected to close in Fall of 2008.<ref>{{cite web|url=http://articles.moneycentral.msn.com/Investing/Dispatch/US-auto-sales-plunge.aspx|title=US auto sales plummet|publisher=Microsoft|accessdate=2008-10-06}}</ref> |
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== Responses to crisis== |
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Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis. |
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===Legislative and regulatory responses === |
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==== The Federal Reserve ==== |
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{{further|[[Federal Reserve responses to the subprime crisis]]}} |
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The U.S. central banking system, the [[Federal Reserve]], in partnership with central banks around the world, has taken several steps to address the crisis. Federal Reserve Chairman [[Ben Bernanke]] stated in early 2008: "Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy."<ref name = "Bernanke20080110a">{{cite speech | title = Financial Markets, the Economic Outlook, and Monetary Policy | author = [[Ben S. Bernanke]] | date = 2008-01-10 | location = [[Washington, D.C.]] | url=http://www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm | accessdate=2008-06-05 }}</ref> |
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*Between 18 September 2007 and 30 April 2008, the target for the [[Federal funds rate]] was lowered from 5.25% to 2% and the discount rate was lowered from 5.75% to 2.25%, through six separate actions.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm|title=FRB: Press Release-FOMC Statement-18 September 2007<!-- Bot generated title -->}}</ref><ref>{{cite web|url=http://www.federalreserve.gov/newsevents/press/monetary/20080318a.htm|title=FRB: Press Release-FOMC statement-18 March 2008<!-- Bot generated title -->}}</ref> |
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*The Fed and other central banks have conducted [[open market operations]] to ensure member banks have access to funds (i.e., liquidity). These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates charged to member banks (called the discount rate in the U.S.) for short-term loans.<ref>{{cite web | title = FRB: Speech--Bernanke, The Recent Financial Turmoil and its Economic and Policy Consequences--15 October 2007 | url=http://federalreserve.gov/newsevents/speech/bernanke20071015a.htm | accessdate=2008-05-19 | year = 2008 }}</ref> |
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*The Fed is using the [[Term auction facility]] (TAF) to provide short-term loans (liquidity) to banks. The Fed increased the monthly amount of these auctions to $100 billion during March 2008, up from $60 billion in prior months. |
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*In July 2008, the Fed finalized new rules that apply to mortgage lenders.<ref>{{cite web|url=http://www.federalreserve.gov/newsevents/testimony/bernanke20080715a.htm|title=FRB: Testimony-Bernanke, Semiannual Monetary Policy Report to the Congress-15 July 2008<!-- Bot generated title -->}}</ref> |
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*In October 2008, the Fed expanded the collateral it will loan against to include [[commercial paper]], to help address continued liquidity concerns.<ref>[http://biz.yahoo.com/ap/081007/financial_meltdown.html Fed Action on Commercial Paper]</ref> |
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====Regulation==== |
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{{further|[[Regulatory responses to the subprime crisis]]}} |
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Regulators and legislators are considering action regarding lending practices, bankruptcy protection, tax policies, affordable housing, credit counseling, education, and the licensing and qualifications of lenders.<ref>{{cite web|url=http://jec.senate.gov/Documents/Reports/10.25.07OctoberSubprimeReport.pdf|title=JEC October Subprime Report - FINAL FINAL<!-- Bot generated title -->|format=PDF}}</ref> Regulations or guidelines can also influence the nature, transparency and regulatory reporting required for the complex legal entities and securities involved in these transactions. Congress also is conducting hearings to help identify solutions and apply pressure to the various parties involved.<ref>{{cite web | title = Speaker Nancy Pelosi | Issues | url=http://speaker.gov/issues?id=0053 | accessdate=2008-05-19 | year = 2008 }}</ref> |
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*A sweeping proposal was presented 31 March 2008 regarding the regulatory powers of the U.S. Federal Reserve, expanding its jurisdiction over other types of financial institutions and authority to intervene in market crises.<ref>{{cite web|url=http://www.cnn.com/2008/US/03/28/financial.oversight/index.html|title=Plan would expand Fed's power to intervene in financial crisis - CNN.com<!-- Bot generated title -->}}</ref> |
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*In response to a concern that lending was not properly regulated, the House and Senate are both considering bills to regulate lending practices.<ref>{{cite web | title = Free Preview - WSJ.com | url=http://online.wsj.com/article/SB118904231551018883.html?mod=googlenews_wsj | accessdate=2008-05-19 | year = 2008 }}</ref> |
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*In the wake of a subprime mortgage crisis and questions about [[Countrywide]]’s VIP program, ethics experts and key senators recommend that members of Congress should be required to disclose information about their mortgages.<ref>{{cite news | title=Congress keeps mortgages off books |
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| date=2008-06-18 | publisher = [[Politico]] | url=http://www.politico.com/news/stories/0608/11159.html}}</ref> |
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*Non-depository banks (e.g., investment banks and mortgage companies) are not subject to the same capital reserve requirements as depository banks. Many of the investment banks had limited capital reserves to address declines in mortgage backed securities or support their side of credit default derivative insurance contracts. Nobel prize winner [[Joseph Stiglitz]] recommends that regulations be established to limit the extent of leverage permitted and not allow companies to become "too big to fail."<ref>{{cite web|url=http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html|title=Stigliz Recommendations}}</ref> |
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*UK regulators announced a temporary ban on [[Short (finance)|short-selling]] of financial stocks on September 18, 2008.<ref>{{cite web|url=http://biz.yahoo.com/ap/080918/eu_britain_short_selling.html|title=biz.yahoo.com/ap/080918/eu_britain_short_selling.html<!--INSERT TITLE-->}}</ref> |
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*The Australian ferderal government has announed an investment of AU$4 billion in non-bank lender mortgage backed securities in an attempt to maintain competition in the mortgage market.<ref>{{cite web|url=http://www.homeloanexperts.com.au/articles/sub_prime_crisis.php|title=www.homeloanexperts.com.au/articles/sub_prime_crisis.php<!--INSERT TITLE-->}}</ref> |
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====Economic Stimulus Act of 2008==== |
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President Bush also signed into law on 13 February 2008 an [[Economic Stimulus Act of 2008|economic stimulus package]] of $168 billion, mainly in the form of income tax rebates, to help stimulate economic growth.<ref name = "Yahoo-mail"/> The economic stimulus package included the mailing of rebate checks to taxpayers. Such mailings started the week of 28 April 2008. These mailings, however, coincided with unexpected all-time [[Oil price increases since 2003|jumps]] in food and gasoline prices. This coincidence prompted some to question whether the stimulus package would have the desired effect or whether consumers would just use it to make up for the gap generated by the higher food and fuel prices. Some Congressmen even contemplated legislation for a second round of stimulus rebate checks to ensure the initial intention of the stimulus package had the expected effect. The Treasury Secretary strongly opposed such initiative. |
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====Housing and Economic Recovery Act of 2008==== |
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The [[Housing and Economic Recovery Act of 2008]] included six separate major acts designed to restore confidence in the domestic mortgage industry.<ref>{{cite web|url=http://banking.senate.gov/public/_files/HousingandEconomicRecoveryActSummary.pdf|title=Summary of Act|format=PDF}}</ref> The Act included: |
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*Providing insurance for $300 billion in mortgages estimated to assist 400,000 homeowners. |
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*Establishing a new regulator to ensure the safe and sound operation of the GSE's (Fannie Mae and Freddie Mac) and Federal Home Loan banks. |
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*Raises the dollar limit of the mortgages the government sponsored enterprises ([[GSE]])'s can purchase. |
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*Provides loans for the refinancing of mortgages to owner-occupants at risk of foreclosure. The original lender or investor reduces the amount of the original mortgage (typically taking a significant loss) and the homeowner shares any future appreciation with the [[Federal Housing Administration]]. The new loans must be 30-year fixed loans. |
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*Enhancements to mortgage disclosures. |
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*Community assistance to help local governments buy and renovate foreclosed properties. |
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===Government bailouts=== |
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{{Main|Government Bailouts Due to Subprime Crisis}} |
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{{see also|List of bankrupt or acquired banks during the subprime mortgage crisis|Federal takeover of Fannie Mae and Freddie Mac}} |
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[[Image:Birmingham Northern Rock bank run 2007.jpg|thumb|right|People queuing outside a [[Northern Rock]] bank branch in [[Birmingham]], United Kingdom on September 15, 2007, to [[bank run|withdraw their savings]] due to fallout from the subprime crisis.]] |
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*[[Northern Rock]] had difficulty finding finance to keep the business going and approached the [[Bank of England]] as [[lender of the last resort]] on 12 September 2007. This caused mass concern about the bank's future. The [[Bank of England]] and the [[UK Government]] both insisted that the bank was secure and would not collapse. However this failed to stop thousands of customers withdrawing around £1billion from their savings. [[Northern Rock]]'s share price plummeted and under intense pressure from the media, political opposition parties and customers of Northern Rock to take action, the Government opted to nationalize Northern Rock on 17 February 2008. As of October 8th, 2008, UK taxpayer liability for the bank had climbed to £87Bn ($150Bn) according to Robert Chote, director of the Institute for Fiscal Studies. <ref>http://www.telegraph.co.uk/finance/comment/3161595/Financial-Crisis-Someone-will-have-to-dig-us-out-of-all-this-debt.html</ref> |
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*[[Bear Stearns]] was acquired in March 2008 by [[J.P. Morgan Chase]] for $1.2 billion,<ref>{{cite web|url=http://www.nytimes.com/2008/03/25/business/25bear.html |title=Seeking Fast Deal, JPMorgan Quintuples Bear Stearns Bid - New York Times |publisher=Nytimes.com |author=Landon Thomas Jr. And Eric Dash |date=Published: March 25, 2008 |accessdate=2008-10-06}}</ref> in order for deal to go through the Fed to issued a [[nonrecourse loan]] of $29 billion to [[Bear Stearns]].<ref>http://www.jpmorgan.com/cm/Satellite?</ref> |
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*[[Federal National Mortgage Association|Fannie Mae]] and [[Federal Home Loan Mortgage Corporation|Freddie Mac ]]. In September 2008, the Treasury Department confirmed that both Fannie Mae and Freddie Mac would be placed into [[conservatorship]]<ref name="yf-poirier1">{{cite news | first = John | last = Poirier | coauthors = Patrick Rucker | title = Government plan for Fannie, Freddie to hit shareholders | url = http://biz.yahoo.com/rb/080906/fannie_freddie.html?.v=4 | work = [[Reuters]] | publisher = Yahoo! Finance | date = 2008-09-06 | accessdate = 2008-09-17 }}</ref> with the government taking over management of the pair. |
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*[[Merrill Lynch]] was acquired by [[Bank of America]] in September 2008 for $50 billion.<ref name="abcau-duhigg1">{{cite news | first = Kim | last = Landers | title = Lehman tumbles, Merrill Lynch totters on Meltdown Monday | url = http://www.abc.net.au/news/stories/2008/09/16/2365548.htm | work = [[ABC News (Australia)|ABC News]] | publisher = [[Australian Broadcasting Corporation]] | location = [[Ultimo, New South Wales]] | date = 2008-09-16 | accessdate = 2008-09-17 }}</ref> |
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*Scottish banking group [[HBOS]] agreed on 17 September 2008 to be acquired by UK rival [[Lloyds TSB]] in an emergency takeover after its share price experienced significant falls amid fears over its exposure to toxic debt. The deal was encouraged by the UK government, who agreed to waive competition rules to allow the takeover to go ahead.<ref name="tdm-anon1">{{cite news | first = | last = | title = HBOS agrees emergency merger with Lloyds TSB after Brown 'encourages banks to do a deal' | url = http://www.dailymail.co.uk/news/article-1056351/HBOS-agrees-emergency-merger-Lloyds-TSB-Brown-encourages-banks-deal.html | work = The Daily Mail | location = [[London]], England, UK | date = 2008-09-17 | accessdate = 2008-09-17 }}</ref> |
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*[[Lehman Brothers]] declared bankruptcy on 15 September 2008, facing a refusal by the federal government to bail it out.<ref name="tbj-duhigg1">{{cite news | first = | last = | title = Lehman Brothers: Bankruptcy filing won’t impact Tampa unit | url = http://www.bizjournals.com/tampabay/stories/2008/09/15/daily2.html | work = [[Tampa Bay Business Journal]] | publisher = American City Business Journals, Inc. | location = [[Tampa Bay, Florida]] | date = 2008-09-15 | accessdate = 2008-09-17 }}</ref> Treasury Secretary [[Hank Paulson]] cited [[moral hazard]] as a reason for not bailing out Lehman Brothers.<ref name="time-saporito1">{{cite news | first = Bill | last = Saporito | title = Getting Suckered by Wall Street — Again | url = http://www.time.com/time/business/article/0,8599,1841567,00.html | work = [[Time (magazine)|TIME]] | publisher = [[Time Inc.]] | date = 2008-09-16 | accessdate = 2008-09-17 }}</ref> |
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*[[AIG]]: In September 2008, [[The Fed]] provided an emergency loan of $85 billion to AIG,<ref name="bw-ap1">{{cite news | first = | last = | title = The Fed Bails Out AIG | url = http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080916_387203.htm?chan=top+news_top+news+index+-+temp_top+story | work = [[BusinessWeek]] | location = [[New York City|New York, New York]] | date = 2008-09-16 | accessdate = 2008-09-17 }}</ref> loan which will be repaid by selling off assets of the company.<ref name="time-fox1"> |
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{{cite news | first = Justin | last = Fox | title = |
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Why the Government Wouldn't Let AIG Fail | url = http://www.time.com/time/business/article/0,8599,1841699,00.html | work = [[Time (magazine)|TIME]] | publisher = [[Time Inc.]] | date = 2008-09-16 | accessdate = 2008-09-17 }} |
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</ref> This intervention gave the [[US government]] a 79.9% equity stake at AIG.<ref name="time-fox1" /> |
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*[[Washington Mutual]]: In September 2008, Washington Mutual declared bankruptcy.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=a_WW5ZH_P_A0&refer=home |title=Bloomberg.com: Worldwide |publisher=Bloomberg.com |date= |accessdate=2008-10-06}}</ref> The United States [[Office of Thrift Supervision]] (OTS) announced that it was seizing WaMu and would sell most of its functional assets to [[JPMorgan Chase]].<ref>{{cite web|url=http://online.wsj.com/article/SB122238415586576687.html"|title=J.P. Morgan to Take Over Faltering WaMu"}}</ref> |
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* On 29 September 2008, British bank [[Bradford & Bingley]] was nationalised by the UK government. The government will take control of the bank's £50bn mortgages and loans, while its savings operations and branches are to be sold to Spain's Santander.<ref>{{cite web|url=http://news.bbc.co.uk/1/hi/business/7521250.stm"|title=BBC News Timeline: Global credit crunch"}}</ref> |
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====Emerging plan to bail out financial institutions==== |
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{{See also|Emergency Economic Stabilization Act of 2008}} |
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On 19 September 2008, the U.S. government announced a plan to purchase large amounts of illiquid, risky mortgage backed securities from financial institutions,<ref>{{cite web|url=http://www.ustreas.gov/press/releases/hp1149.htm|title=Treasury - Paulson News Release}}</ref> which is estimated to involve at minimum, $700 billion of additional commitments.<ref>{{cite web|url=http://www.nytimes.com/2008/09/21/business/21cong.html?hp|title=Administration Is Seeking $700 Billion for Wall Street|publisher=New York Times}}</ref> This plan also included a ban on short-selling of financial stocks.<ref>{{cite web|url=http://money.cnn.com/2008/09/19/news/economy/paulson/index.htm?postversion=2008091910|title=Bush: 'We must act now'|publisher=CNN Money}}</ref> The mortgage market is estimated at $12 trillion<ref name="nytimes1"/> with approximately 9.2% of loans either seriously delinquent or in foreclosure through August 2008.<ref name="mbaa1"/> On September 29, 2008 the House of Representatives rejected a revised version of the plan.<ref name="housedefeat"> [http://clerk.house.gov/cgi-bin/vote.asp?year=2008&rollnumber=674 U.S. House of Representatives vote results on H.R. 3997],</ref> On October 1, 2008 the U.S. Senate approved an amended version of the plan.<ref name="senateapproval">{{cite web|url=http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=110&session=2&vote=00213|title=U.S. Senate vote results on H.R. 1424}}</ref>, which was approved by the House on October 3 and immediately signed into law by President Bush. |
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===Lending industry action; Loan modification and loss mitigation=== |
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Lenders and homeowners both may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have taken action to reach out to homeowners to provide more favorable mortgage terms (i.e., refinancing, loan modification or [[loss mitigation]]). Homeowners have also been encouraged to contact their lenders to discuss alternatives.<ref>{{cite web | title = Criticism rains down on mortgage industry - USATODAY.com | url=http://www.usatoday.com/money/economy/housing/2007-10-23-mortgages-refinance_N.htm | accessdate=2008-05-19 | year = 2008 }}</ref> |
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Corporations, trade groups, and consumer advocates have begun to cite statistics on the numbers and types of homeowners assisted by loan modification programs. There is some dispute regarding the appropriate measures, sources of data, and adequacy of progress. A report issued in January 2008 showed that mortgage lenders modified 54,000 loans and established 183,000 repayment plans in the third quarter of 2007, a period in which there were 384,000 new foreclosures. Consumer groups claimed the modifications affected less than 1% of the 3 million subprime loans with adjustable rates that were outstanding in the third quarter.<ref>{{cite news | first = Alan | last = Zibel | title=Report: More Foreclosures Than Workouts | work = [[Associated Press]] | publisher=''[[International Business Times]]'' | url=http://www.ibtimes.com/articles/20080117/report-more-foreclosures-than-workouts.htm | date = 2008-01-17 | accessdate = 2008-09-17 }}</ref> |
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The State Foreclosure Prevention Working Group, a coalition formed by 11 state attornies general and bank regulators, reported in April 2008 that the increasing pace of foreclosures exceeds the ability of loan servicers to keep up. Seventy percent of subprime mortgage holders are not getting the help required. Nearly two-thirds of loan workouts require more than six weeks to complete under the current "case-by-case" method of review. The group has recommended applying a more systematic method of loan modification that can automatically be applied to a large number of struggling homeowners and slowing down the pace of foreclosures.<ref>{{cite news | first = Les | last = Christie | title=No help for 70% of subprime borrowers | work = [[CNNMoney.com]] | publisher=[[Cable News Network]] | url=http://money.cnn.com/2008/04/22/real_estate/no_help_for_most_borrowers/index.htm?cnn=yes | date = 2008-04-22 | accessdate = 2008-09-17 }}</ref> |
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In response to a legal settlement with several states announced 5 October 2008, Bank of America has announced a more aggressive program to systematically help an estimated 400,000 homeowners stay in their homes. This includes limiting payments to a specific level of income and writing down the values of mortgages.<ref>[http://money.cnn.com/2008/10/06/real_estate/Drastic_plan_slashes_mortgage_costs/index.htm?source=yahoo_quote Bank of A plan]</ref> |
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In Australia several lenders have amended their policy for low doc, no doc and no deposit loans that are considered to be riskier than standard home loans. Overall these changes have been relatively minor with the exception of the non conforming lenders that lend to credit impaired and subprime borrowers. It is unknown if this trend will continue or if Australian lenders will be forced to withdraw from riskier loan products.<ref>[http://www.homeloanexperts.com.au/articles/sub_prime_crisis_loans.php Policy changes made by Australian banks in response to the subprime crisis]</ref> |
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====Hope Now Alliance==== |
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[[George W. Bush|President George W. Bush]] announced a plan voluntarily and temporarily to freeze the mortgages of a limited number of mortgage debtors holding [[adjustable rate mortgage|ARMs]].<ref>{{cite web|url=http://www.whitehouse.gov/news/releases/2007/12/20071206-9.html|title=President Bush Discusses Housing|accessdate=2008-05-19|date=6 December 2007}}</ref><ref>{{cite web|url= http://www.whitehouse.gov/news/releases/2007/12/20071206-7.html|title=Fact Sheet: Helping American Families Keep Their Homes|accessdate=2008-05-19|date=6 December 2007}}</ref> A refinancing facility called [[FHA-Secure]] was also created.<ref>{{cite web | title = HUD News Release 07-123 | url=http://www.hud.gov/news/release.cfm?content=pr07-123.cfm | accessdate=2008-05-19 | year = 2008 }}</ref> |
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This action is part of an ongoing collaborative effort between the US Government and private industry to help some sub-prime borrowers called the [[Hope Now Alliance]].<ref>{{cite web|url=http://www.fsround.org/media/pdfs/AllianceRelease.pdf|title=www.fsround.org/media/pdfs/AllianceRelease.pdf<!--INSERT TITLE-->|format=PDF}}</ref> |
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The Hope Now Alliance released a report in February, 2008 indicating it helped 545,000 subprime borrowers with shaky credit in the second half of 2007, or 7.7% of 7.1 million subprime loans outstanding in September 2007. A spokesperson acknowledged that much more must be done.<ref>{{cite news | title = Hope Now says nearly 8% of subprime borrowers helped - Feb. 6, 2008 | url=http://money.cnn.com/2008/02/06/news/economy/loan_modification.ap/index.htm?source=yahoo_quote | accessdate=2008-05-19 | year = 2008 }}</ref> During February 2008, a program called "Project Lifeline" was announced. Six of the largest U.S. lenders, in partnership with the Hope Now Alliance, agreed to defer foreclosure actions for 30 days for homeowners 90 or more days delinquent on payments. The intent of the program was to encourage more loan adjustments, to avoid foreclosures.<ref>{{cite news | title = Major lenders put freeze on foreclosures - Feb. 12, 2008 | url=http://money.cnn.com/2008/02/12/real_estate/foreclosure_freeze/index.htm | accessdate=2008-05-19 | year= 2008 }}</ref> |
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===Bank capital replenishment=== |
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Major financial institutions obtained over $260 billion in new capital (i.e., cash investments) as of May 2008.<ref>{{cite web|url=http://biz.yahoo.com/ibd/080515/general01.html?.v=1|title=Raising Capital Getting Harder For Banks: Financial News - Yahoo! Finance}}</ref> Such capital is used to help banks maintain required capital ratios (an important measure of financial health), which have declined significantly due to subprime loan or CDO losses. This capital was raised by issuing such instruments as [[Bond (finance)|bonds]] or [[preferred stock]] to investors in exchange for cash. Such capital raising has been advocated by the leaders of the U.S. Federal Reserve and the Treasury Department.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=as6dAXt3h7F4&refer=home|title=Bloomberg.com: Worldwide}}</ref> Well-funded banks are in a better position to loan at favorable interest rates, which offsets the liquidity and uncertainty aspects of the crisis. |
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The ability of some banks and securities firms to place such large volumes of debt with investors is an indication to some analysts that these firms will survive the credit crisis.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=aZGRJRZkn1Qc&refer=home|title=Bloomberg.com: Worldwide}}</ref> In response to the crisis, the last independent investment banks, [[Goldman Sachs]] and [[Morgan Stanley]], elected to become [[bank holding company|bank holding companies]] in order to gain access to additional liquidity.<ref>{{cite news |
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|url=http://dealbook.blogs.nytimes.com/2008/09/21/goldman-morgan-to-become-bank-holding-companies/?em |
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|title=Goldman, Morgan to Become Full-Fledged Banks |
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|first=Andrew Ross |
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|last=Sorkin |
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|publisher=The New York Times |
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|date=2008-09-21 |
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|accessdate=2008-09-21 |
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}}</ref> |
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Banks have obtained some of this capital from sovereign wealth funds, which are entities that control the surplus savings of developing countries. An estimated U.S. $69 billion has been invested by these entities in large financial institutions over the past year. On 15 January 2008, sovereign wealth funds provided a total of $21 billion to two major U.S. financial institutions. Sovereign wealth funds are estimated to control nearly $2.9 trillion. Much of this wealth is oil and gas related. As they represent the surplus funds of governments, these entities carry at least the perception that their investments have underlying political motives.<ref>{{cite web | title = Capital markets | The invasion of the sovereign-wealth funds | Economist.com |
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| url=http://www.economist.com/opinion/displaystory.cfm?story_id=10533866 | accessdate=2008-05-19 | year = 2008 }}</ref> |
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Certain major banks have also reduced their [[dividend]] payouts<ref>{{cite web|url=http://www.marketwatch.com/news/story/citi-dividend-cut-criticized-move/story.aspx?guid=%7BC3A8E328-D29E-4C3D-A08C-9092B49C0799%7D|title=Citi dividend cut criticized; move suggests more losses to come - MarketWatch}}</ref> to increase liquidity and further dividend reductions are expected by some analysts in 2008.<ref>{{cite web|url=http://www.reuters.com/article/ousiv/idUSN0629242420080206|title=More banks likely to cut dividends: Bernstein | Reuters}}</ref> Of the 3,776 U.S. [[FDIC]] insured institutions that paid common stock dividends in the first quarter of 2007, almost half (48%) paid lower dividends in the first quarter of 2008, including 666 institutions that paid no dividends. Insured institutions paid $14.0 billion in total dividends in the first quarter, down $12.2 billion |
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(46.5%) from a year earlier.<ref>{{cite web|url=http://www4.fdic.gov/qbp/2008mar/qbp.pdf|title=FDIC Q1 '08 Banking Profile|format=PDF}}</ref> |
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===Litigation=== |
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Litigation related to the subprime crisis is underway. A study released in February 2008 indicated that 278 civil lawsuits were filed in federal courts during 2007 related to the subprime crisis. The number of filings in state courts was not quantified but is also believed to be significant. The study found that 43% of the cases were class actions brought by borrowers, such as those that contended they were victims of discriminatory lending practices. Other cases include securities lawsuits filed by investors, commercial contract disputes, employment class actions, and bankruptcy-related cases. Defendants included mortgage bankers, brokers, lenders, appraisers, title companies, home builders, servicers, issuers, underwriters, bond insurers, money managers, public accounting firms, and company boards and officers.<ref>{{cite web | title = Subprime lawsuits on pace to top S&L cases - The Boston Globe | url=http://www.boston.com/business/articles/2008/02/15/subprime_lawsuits_on_pace_to_top_sl_cases/ | accessdate=2008-05-19 | year = 2008 }}</ref> |
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Former Bear Stearns managers were named in civil lawsuits brought in 2007 by investors, including [[Barclays Bank PLC]], who claimed they had been misled. Barclays claimed that Bear Stearns knew that certain assets in the Bear Stearns [[High-Grade Structured Credit Strategies Enhanced Leverage Master Fund]] were worth much less than their professed values. The suit claimed that Bear Stearns managers devised "a plan to make more money for themselves and further to use the Enhanced Fund as a repository for risky, poor-quality investments." The lawsuit said Bear Stearns told Barclays that the enhanced fund was up almost 6% through June 2007 — when "in reality, the portfolio's asset values were plummeting."<ref name="ap 61908" /> |
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In 2006, the [[Office of Federal Housing Enterprise Oversight| OFHEO]] announced a suit against [[Franklin Raines]], former chairman and chief executive officer of [[Fannie Mae]], which was eventually settled.<ref>{{cite web|url=http://www.webcpa.com/article.cfm?articleid=22660 |title=WebCPA - OFHEO to Sue Former Fannie Mae Execs |publisher=Webcpa.com |author=WebCPA staff |date= |accessdate=2008-10-03}}</ref> |
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===Law enforcement=== |
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The number of [[FBI]] agents assigned to mortgage-related crimes increased by 50% between 2007 and 2008.<ref name="CBS FBI Mortgage Cracks Down">{{cite news | title=FBI Cracks Down On Mortgage Fraud | date=2008-06-19 | publisher = [[CBS news]] | url=http://www.cbsnews.com/stories/2008/06/19/national/main4194649.shtml}}</ref> In June 2008, the FBI stated that its mortgage fraud caseload has doubled in the past three years to more than 1,400 pending cases.<ref>{{cite web|url=http://www.fbi.gov/page2/june08/malicious_mortgage061908.html|title=FBI — Mortgage Fraud Takedown - Press Room - Headline Archives 06-19-08<!-- Bot generated title -->}}</ref> Between 1 March and 18 June 2008, 406 people were arrested for [[mortgage fraud]] in an FBI sting across the country. People arrested include buyers, sellers and others across the wide-ranging mortgage industry.<ref name="CBS FBI Mortgage Cracks Down"/> |
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On 19 June 2008, two former Bear Stearns managers were arrested by the FBI, and were the first Wall Street executives arrested related to the subprime lending crisis. They were suspected of misleading investors about the risky subprime mortgage market.<ref name="ap 61908"> [http://news.yahoo.com/s/ap/20080619/ap_on_bi_ge/bear_stearns_investigation Ex-Bear Stearns managers arrested at their homes] By Tom Hays, Associated Press, 6/19/08. </ref> |
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On 23 September 2008, two government officials stated that the [[Federal Bureau of Investigation]] was looking into the possibility of fraud by mortgage financing companies [[Fannie Mae]] and [[Freddie Mac]], [[Lehman Brothers]], and insurer [[American International Group]].<ref>{{cite web|url=http://money.cnn.com/2008/09/23/news/companies/fbi_finance.ap/index.htm?cnn=yes|title=money.cnn.com/2008/09/23/news/companies/fbi_finance.ap/index.htm?cnn=yes<!--INSERT TITLE-->}}</ref> |
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===Ethics investigation=== |
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{{further|[[Countrywide financial political loan scandal]]}} |
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On 18 June 2008, a Congressional ethics panel started examining allegations that Democrat Senators [[Christopher Dodd]] of Connecticut (the sponsor of a major $300 billion housing rescue bill) and [[Kent Conrad]] of North Dakota received preferential loans by troubled mortgage lender [[Countrywide Financial Corp]].<ref name="reuters1"/> |
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==Effect on the financial condition of the U.S. government== |
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{{see also|United states public debt}} |
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The U.S. federal government has made significant additional financial commitments through efforts to support the financial system. |
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This includes pledges of up to $200 billion to protect [[Fannie Mae]] and [[Freddie Mac]], an $85 billion bridge loan for [[AIG]], and a $29 billion loan guarantee for [[Bear Stearns]]. As the crisis has progressed, the Fed has expanded the collateral against which it loans, including higher-risk assets and (in certain cases) equity.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=akZVTnBs66uY&refer=home|title=Bloomberg Article}}</ref> Through June 2008, the Fed had provided approximately $1.2 trillion in loans to various financial institutions through its [[Term auction facility]].<ref>{{cite web|url=http://useconomy.about.com/b/2008/06/02/fed-bailout-tops-12-trillion-is-it-working.htm|title=TAF activity}}</ref> The extent to which the federal government will suffer losses on these investments is not presently clear.<ref>{{cite web|url=http://www.forbes.com/2008/09/08/fannie-freddie-bailout-markets-equity_md_0908markets12.html|title=Forbes Article}}</ref> |
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In addition, an estimated $1.2 trillion reduction in housing prices and slowing of the economy are expected to significantly reduce state and local property tax revenues.<ref>{{cite web|url=http://www.maximsnews.com/news20080227waterkathyschandlingfinance10802270101.htm|title=Effect on municipalities}}</ref> |
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The expectation of the falling state and local property tax revenues is affecting the ability of state governments to finance their operations through bond sales. Both the State of California and the State of Massachusetts have requested loans from the U.S. Federal Reserve to fund their operations since the credit markets have seized up. |
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==Expectations and forecasts== |
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The legacy of [[Alan Greenspan]] has been cast into doubt with Senator [[Chris Dodd]] claiming he created the "[[perfect storm]]".<ref>{{cite web | title = FT.com / Companies / US & Canada - Fed rapped over subprime loans | url=http://www.ft.com/cms/s/66d98aea-d8e4-11db-a759-000b5df10621,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F66d98aea-d8e4-11db-a759-000b5df10621.html&_i_referer=http%3A%2F%2Fftalphaville.ft.com%2Fblog%2F2007%2F03%2F23%2F3374%2Ffed-targetted-in-political-backlash-over-subprime-loans%2F | accessdate=2008-05-19 | year = 2008 }}</ref> Alan Greenspan has remarked that there is a one-in-three chance of recession from the fallout. [[Nouriel Roubini]], a professor at [[New York University]] and head of Roubini Global Economics, has said that if the economy slips into recession "then you have a systemic banking crisis like we haven't had since the 1930s".<ref>{{cite web | title = Subprime crisis could pack political punch |
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| Special Coverage |
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| Reuters |
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| url=http://www.reuters.com/article/reutersEdge/idUSN1542501420070315?pageNumber=1 | accessdate=2008-05-19 | year = 2008 }}</ref> |
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The [[Associated Press]] described the current climate of the market on 13 August 2007, as one where investors were waiting for "the next shoe to drop" as problems from "an overheated housing market and an overextended consumer" are "just beginning to emerge."{{Failed verification|date=March 2008}} [[MarketWatch]] has cited several economic analysts with [[Stifel Nicolaus]] claiming that the problem mortgages are not limited to the subprime niche saying "the rapidly increasing scope and depth of the problems in the mortgage market suggest that the entire sector has plunged into a downward spiral similar to the subprime woes whereby each negative development feeds further deterioration", calling it a "[[vicious cycle]]" and adding that they "continue to believe conditions will get worse".<ref>{{cite web | title = |
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U.S. mortgage, housing markets seen caught in 'vicious cycle' - MarketWatch |
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| url=http://www.marketwatch.com/news/story/story.aspx?guid=%7BF21EA14D%2DE00C%2D46C7%2D9291%2D424B724864FE%7D&siteid=rss | accessdate=2008-05-19 | year = 2008 }}</ref> |
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As of 22 November 2007, analysts at a leading investment bank estimated losses on subprime CDO would be approximately U.S. $148 billion.<ref>{{cite web | title = Bank capital | Tightening the safety belt | Economist.com |
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| url=http://economist.com/finance/displaystory.cfm?story_id=10191747 | accessdate=2008-05-19 | year = 2008 }}</ref> As of 22 December 2007, a leading business periodical estimated subprime defaults between U.S. $200–300 billion.<ref>{{cite web | title = The credit crunch | Postcards from the ledge | Economist.com |
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| url=http://www.economist.com/opinion/displaystory.cfm?story_id=10334574 | accessdate=2008-05-19 | year = 2008 }}</ref> As of 1 March 2008 analysts from three large financial institutions estimated the impact would be between U.S. $350–600 billion.<ref>{{cite web|url=http://www.bloomberg.com/apps/news?pid=20601087&sid=aQFTerb4XMU8&refer=homehttp://www.msnbc.msn.com/|title=Bloomberg.com}}</ref> |
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On 20 March 2008, the [[Organization for Economic Cooperation and Development]] downgraded its economic forecasts for the United States, the [[Eurozone]] and Japan for the first half of 2008.<ref>{{cite web|url=http://edition.cnn.com/2008/BUSINESS/03/20/oecd.recession.ap/index.html|title=OECD cuts world growth outlook - CNN.com}}</ref> |
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Because of the global economy, and the huge subprime "pool" of mortgages that was bought by investors world wide, the International Monetary Fund (IMF) "says that the worldwide losses stemming from the US subprime mortgage crisis could run to $945 billion."<ref>{{cite web|url=http://www.finfacts.com/irishfinancenews/article_1013133.shtml|title=IMF says worldwide losses stemming from the US subprime mortgage crisis could run to $945 billion}}</ref> |
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[[Francis Fukuyama]] has argued that the crisis represents the end of [[Reaganism]], which was characterized by lighter regulation, pared-back government, and lower taxes. Significant regulatory changes are expected as a result of the crisis.<ref>[http://www.newsweek.com/id/162401 Newsweek-Fukuyama - The Fall of America, Inc.]</ref> |
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Alan Greenspan, the former Chairman of the Federal Reserve, stated:<ref name="WallStreetJournal" /> |
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:"The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business." |
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== See also == |
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{{col-begin}} |
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{{col-2}} |
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* [[Proposed bailout of U.S. financial system (2008)]] |
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**[[Emergency Economic Stabilization Act of 2008]] |
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* [[Federal takeover of Fannie Mae and Freddie Mac]] |
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* [[Subprime crisis impact timeline]] |
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* [[Savings and Loan crisis]] |
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* [[Hope Now Alliance]] |
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* [[United States housing market correction]] |
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* [[Subprime lending]] |
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* [[Predatory lending]] |
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* [[Northern Rock]] |
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* [[Collateralized debt obligation#Subprime meltdown|Collateralized debt obligation subprime meltdown]] |
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* [[Bear Stearns#Subprime mortgage hedge fund crisis|Bear Stearns subprime mortgage hedge fund crisis]] |
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* [[List of entities involved in 2007–2008 financial crises]] |
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* [[January 2008 stock market volatility]] |
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* [[United States public debt]] |
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* [[Economic crisis of 2008]] |
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* [[Oil price increases since 2003]] |
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* [[Diamond-Dybvig model]] |
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* [[Ninja loans]] |
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* ''[[Chain of Blame]]: How Wall Street Caused the Mortgage and Credit Crisis'' |
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* [[Countrywide financial political loan scandal]] |
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* [[Shadow banking system]] |
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* [[Panic of 1837]] |
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* [[Names used to describe the Subprime Mortgage Crisis]] |
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{{col-2}} |
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; The world housing bubble |
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* [[Chinese property bubble]] |
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* [[Indian property bubble]] |
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* [[Irish property bubble]] |
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* [[Japanese asset price bubble]] |
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* [[Real estate bubble]] |
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* [[Russian property bubble]] |
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* [[Spanish property bubble]] |
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* [[United States housing bubble]] |
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* [[United Kingdom housing bubble]] |
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{{col-end}} |
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== References == |
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{{reflist|2}} |
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==Further reading== |
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* "A House of Cards - ''from fantasy finance to global crash''". Gerry Gold & Paul Feldman (2007: London, Lupus Books), ISBN 9780952345435 |
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== External links == |
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{{external links}} |
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* [http://urlsnub.com/kbm Subprime Crisis Research Council "White Paper"].September 15, 2008 (Hudson Institute, Washington, DC) |
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* {{cite web|url=http://news.bbc.co.uk/2/hi/business/7073131.stm|title=The US sub-prime crisis in graphics|date=21 November 2007|publisher=[[BBC]]}} |
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* Yuliya Demyanyk (FRB St. Louis) and Otto Van Hemert (NYU Stern, [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020396 "Understanding the Subprime Mortgage Crisis"], Working paper published at [[Social Science Research Network]], August 19, 2008 draft. |
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* Carmen M. Reinhart and Kenneth S. Rogoff, [http://www.economics.harvard.edu/faculty/rogoff/files/Is_The_US_Subprime_Crisis_So_Different.pdf Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison], [[Harvard University]], February 5, 2008. |
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* Danielle DiMartino and John V. Duca, [http://dallasfed.org/research/eclett/2007/el0711.pdf The Rise and Fall of Subprime Mortgages], [[Federal Reserve Bank of Dallas]] "Economic Letter," Vol. 2, No. 11, November 2007. |
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* Robin Blackburn, [http://www.newleftreview.org/?view=2715 The Subprime Mortgage Crisis], [[New Left Review]] #50, March–April 2008. |
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* Milken Institute, [http://www.slideshare.net/pkedrosky/making-sense-of-the-mortgage-meltdown-presentation?type=powerpoint Demystifying the Mortgage Meltdown: Slideshow], October 2, 2008. |
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{{2008 economic crisis}} |
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[[Category:United States housing bubble]] |
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[[Category:Mortgage]] |
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[[Category:Financial crises]] |
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[[Category:2000s economic history|*]] |
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[[Category:2008 in economics]] |
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[[Category:Economic disasters in the United States]] |
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[[ar:أزمة الرهن العقاري]] |
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[[ca:Crisi hipotecària de 2007]] |
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[[cs:Americká krize trhu s hypotékami 2007]] |
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[[de:Finanzkrise 2007/2008]] |
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[[es:Crisis de las hipotecas subprime]] |
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[[fr:Crise des subprimes]] |
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[[ko:서브프라임 모기지 사태]] |
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[[he:משבר הסאבפריים]] |
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[[ka:ამერიკის იპოთეკური კრიზისი]] |
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[[hu:Amerikai jelzáloghitel-válság]] |
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[[ms:Krisis gadai janji subprima]] |
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[[nl:Kredietcrisis]] |
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[[no:Subprime-lånekrisen]] |
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[[nds:Finanzkrise 2007/2008]] |
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[[pl:Kryzys finansowy 2007/2008]] |
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[[pt:Crise do crédito hipotecário de alto risco]] |
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[[fi:Subprime-kriisi]] |
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[[th:วิกฤติสินเชื่อซับไพรม์]] |
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[[vi:Khủng hoảng tín dụng nhà ở thứ cấp]] |
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[[zh:次級房屋信貸危機]] |
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Latest revision as of 17:10, 10 October 2008
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