This is a summary of events that lead to the current Global Financial Crisis.
January 2008
- Starting from the 2nd. day of the New Year US Stock Markets took a Downturn for about three weeks.
- The National Association of Realtors announced that drop in New Housing Sales in 2007 was the largest drop in 25 years.
March 2008
- Bear Stearns caught the attention of Fed and gets Fed funding as shares plummet.
- JP Morgan Chase acquired Bear Stearns shares at USD 2 a share in a fire sale avoiding bankruptcy.
May 2008
- A shocking announcement by UBS AG Swiss Bank. The UBS AG Swiss bank announced plans to cut 5,500 jobs by the middle of 2009.
July 2008
- The IndyMac Bank is placed into the receivership. At the time of writing this chronology there was an announcement that Gorge Soros, Michael Dell in a Consortium with five others agreed to purchase IndyMac Bank for USD 13.9 billion last week.
- Major banks and financial institutions reported losses in mortgage backed securities amounting to about US$435bil.
- President Bush signs into law the Housing and Economic Recovery Act of 2008 which authorizes the Federal Housing Administration to guarantee up to USD 300billion in new 30-year fixed rate mortgages for subprime borrowers.
Sept 2008
- Fed takeover of Fannie Mae and Freddie Mac which owned or guaranteed about half of America’s USD 12 trillion mortgage market.
- Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis.
- Lehman Brothers files for bankruptcy protection.
- The US Federal Reserve loans US$85bil to AIG to avoid bankruptcy.
- Paulson financial rescue plan unveiled.
- Washington Mutual seized by the Federal Deposit Insurance Corporation, and its banking assets sold to JP Morgan Chase for USD 1.9 billion.
Oct 2008
- The US Senate passes the USD 700 billion bailout plan bill.
- The financial crisis spreads to Europe.
- President Bush signs into law the Emergency Economic Stabilization Act (EESA) creating a US$700bil Troubled Assets Relief Program (TARP) to purchase failing bank assets.
- Wells makes a higher offer for Wachovia, snatching it from Citigroup.
- The worst week for the stock market in 75 years. The Dow Jones lost 22.1 per cent.
- Fed provides USD 900 billion in short-term cash loans to banks.
- Fed makes emergency move to lend around USD 1.3 trillion to companies outside the financial sector.
- Central banks in USA (Fed), England, China, Canada, Sweden, Switzerland and the European Central Bank cut Interest Rates in a coordinated effort to aid world economy.
- The US taps into the USD 700 billion available from the EESA and announces the injection of USD 250 billion into the US banking system.
- The US Federal Reserve announces it will spend USD 540 billion to purchase short-term debt from money market mutual funds.
Nov 2008
- The Treasury gives out USD 33.6 billion to 21 banks in second round of disbursements.
- The US government agrees to rescue Citigroup after an attack by investors caused the stock price to plummet 60% over the previous week.
- The US Federal Reserve pledges an additional USD 800 billion to revive the financial system.
Dec 2008
- President Bush announces USD 17.4 billion emergency loans to US car makers.
The Banking System and the Global Financial Crisis
A total of 25 U.S. bank failures in 2008 compared with three for all of 2007 and are far more than in the previous five years combined. Many more banks are expected to sink this year.
Tun Dr Mahathir Bin Mohamad in his speech at the Institute For Policy And International Studies, Tehran, on 30 November 2008 said:
“The present banking system was created some 300 years ago by the Rothschild’s. In that system money is actually made out of thin air, out of nothing. No gold or other assets were necessary. Yet the money borrowed from them has accepted values. Each time money is lent it creates money for the banks.
The United States Federal Reserve Bank is not owned by the Government. It is owned by twelve privately owned state reserve banks. Yet the Federal Reserve Bank can actually print and issue currency notes, without any backing. Certainly it can lend money to the Government in the form of cheques.
Other banks can borrow from the Federal Reserve Bank when short. But these banks can lend much more than the amount of capital and the deposits from its clients. In the American system the banks can lend 90% of the deposits by its clients. But such is the system in use that the banks can actually lend 10 times the amount that it holds in the form of deposits.”
“When banks go bankrupt a whole lot of other businesses which depend on the banks for their operating capital will also go bankrupt. Hence, the bankruptcies of the three huge automotive companies of America.
The hedge funds are also affected as they depend on loans from the banks to leverage their investments.”
“To avoid risks these loans were bundled up together with the good loans and insured with insurance companies such as AIG. The banks may also allow for a second mortgage to hedge against possible default.”
Related statement by Ben Bernanke and Alan Greenspan:
US Federal Reserve Chairman Ben Bernanke said at a conference on Dec 4, “One unfortunate consequence of the rapid increases in house prices was that providers of mortgage credit came to view their loans as well-secured by the rising values of their collateral and thus paid less attention to borrowers’ ability to repay.”
“Former Federal Reserve Chairman Alan Greenspan told the House Oversight Committee in October that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had been proven wrong by the current crisis. He called this a “mistake” in his views and said he had been shocked by that.
Greenspan said he had made a “mistake” in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions.
Greenspan called this “a flaw in the model that I perceived is the critical functioning structure that defines how the world works”.”
Conclusion
The subprime mortgage loans and the unregulated banking system of the US are the prime contributors to the Global Financial Crisis.
Excellant information and highly appreciated. This is helping me to understand the way of entering the recession. It is a truth that recession can happen at any time but it will come ok later. compare with previous, this time it is long lasting but certainly it will be ok after some more time.
Sherin
Wow. This is really interesting to read, though very sad. Maybe the world is coming to an end
Very nice information. Thanks for this.
The summary of the events of financial crisis is really helpful to analyze the gradual development of the downturn. We all think that the economic crisis came once in a sudden. But this analysis make our perception clear. We must have to work hard and work cautiously to avoid being caught in the trap of financial crisis. Hope this crisis will be over in near future.
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