Global financial crisis of 2008–2009

The global financial crisis of September–October 2008 is a major ongoing financial crisis, the worst of its kind since the Great Depression. It became prominently visible in September, 2008 with the failure, merger or conservatorship of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.

Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global crisis resulting in a number of European bank failures and declines in various stock indexes, and significant reductions in the market-value of equities (stock) and commodities worldwide. The crisis has lead to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liqudity crisis. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change. The crisis has roots in the subprime mortgage crisis and is an acute phase of the financial crisis of 2007–2008.

Week of September 7, 2008

Main article: Federal takeover of Fannie Mae and Freddie Mac

The United States director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, on September 7, 2008 announced his decision to place two United States Government sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by FHFA. United States Treasury Secretary Henry Paulson, at the same press conference stated that placing the two GSEs into conservatorship was a decision he fully supported, and said that he advised "that conservatorship was the only form in which I would commit taxpayer money to the GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction." The same day, Federal Reserve Bank Chairman Ben Bernanke stated in support: "I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies."

Week of September 14, 2008

Major financial firm crisis

On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. The same day, the sale of Merrill Lynch to Bank of America was announced. The beginning of the week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15, and Wednesday, September 17. On September 16, the large insurer American International Group (AIG), a significant participant in the credit default swaps markets suffered a liquidity crisis following the downgrade of its credit rating. The Federal Reserve, at AIG's request, and after AIG has shown that it could not find lenders willing to save it from insolvency, created a credit facility for up to US$85 billion in exchange for an 79.9% equity interest, and the right to suspend dividends to previously issued common and preferred stock.

Money market funds insurance and short sales prohibitions

On September 16, the Reserve Primary Fund, a large money market mutual fund, lowered its share price below $1 because of exposure to Lehman debt securities. This resulted in demands from investors to return their funds as the financial crisis mounted. By the morning of September 18, money market sell orders from institutional investors totalled $0.5 trillion, out of a total market capitalization of $4 trillion, but a $105 billion liquidity injection from the Federal Reserve averted an immediate collapse. On September 19 the U.S. Treasury offered temporary insurance (akin to FDIC insurance of bank accounts) to money market funds. Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States. Similar measures were taken by authorities in other countries. Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission

Troubled Asset Relief Program

Main articles: Emergency Economic Stabilization Act of 2008 and Troubled Asset Relief Program

On September 19, 2008, a plan intended to ameliorate the difficulties caused by the subprime mortgage crisis was proposed by the Secretary of the Treasury, Henry Paulson. He proposed a Troubled Asset Relief Program (later incorporated into the Emergency Economic Stabilization Act of 2008) which would permit for the United States government to purchase illiquid assets (also termed toxic assets) from financial institutions. The value of the securities is extremely difficult to determine.

Consultations between the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the U.S. Securities and Exchange Commission, Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage-backed securities. At the close of the week the Secretary of the Treasury and President Bush announced a proposal for the federal government to buy up to US$700 billion of illiquid mortgage backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market. Details of the bailout remained to be acted upon by Congress.

Week of September 21, 2008

On Sunday, September 21, the two remaining investment banks, Goldman Sachs and Morgan Stanley, with the approval of the Federal Reserve, converted to bank holding companies, a status subject to more regulation, but with readier access to capital. On September 21, Treasury Secretary Henry Paulson announced that the original proposal, which would have excluded foreign banks, had been widened to include foreign financial institutions with a presence in the US. The US administration was pressuring other countries to set up similar bailout plans.

On Monday and Tuesday during the week of September 22, appearances were made by the Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve before Congressional committees and on Wednesday a prime time presidential address was delivered by the President of the United States on television. Behind the scenes, negotiations were held refining the proposal which had grown to 42 pages from its original 3 and was reported to include both an oversight structure and limitations on executive salaries, with other provisions under consideration.

On September 25, agreement was reported by congressional leaders on the basics of the package; however, general and vocal opposition to the proposal was voiced by the public. On Thursday afternoon at a White House meeting attended by congressional leaders and the presidential candidates, John McCain and Barack Obama, it became clear that there was no congressional consensus, with Republican representatives and the ranking member of the Senate Banking Committee, Richard C. Shelby, strongly opposing the proposal. The alternative advanced by conservative House Republicans was to create a system of mortgage insurance funded by fees on those holding mortgages; as the working week ended, negotiations continued on the plan, which had grown to 102 pages and included mortgage insurance as an option. On Thursday evening Washington Mutual, the nation's largest savings and loan, was seized by the Federal Deposit Insurance Corporation and most of its assets transferred to JPMorgan Chase. Wachovia, one of the largest US banks, was reported to be in negotiations with Citigroup and other financial institutions.

Week of September 28, 2008

Early into Sunday morning an announcement was made by the United States Secretary of the Treasury and congressional leaders that agreement had been reached on all major issues: the total amount of $700 billion remained with provision for the option of creating a scheme of mortgage insurance.

It was reported on Sunday, September 28, that a rescue plan had been crafted for the British mortgage lender Bradford & Bingley. Grupo Santander, the largest bank in Spain, was slated to take over the offices and savings accounts while the mortgage and loans business would be nationalized.

Fortis, a huge Benelux banking and finance company was partially nationalized on September 28, 2008, with Belgium, the Netherlands and Luxembourg investing a total of 11.2 billion euros (16.3 billion U.S. dollars) in the bank. Belgium will purchase 49% of Fortis's Belgian division, with the Netherlands doing the same for the Dutch division. Luxembourg has agreed to a loan convertible into a 49% share of Fortis's Luxembourg division.

It was reported on Monday morning, September 29, that Wachovia, the 4th largest bank in the United States, would be acquired by Citigroup.

On Monday the German finance minister announced a rescue of Hypo Real Estate, a Munich-based holding company comprised of a number of real estate financing banks, but the deal collapsed on Saturday, 4 October.

The same day the government of Iceland nationalized Glitnir, Iceland’s third largest lender.

Stocks fell dramatically Monday in Europe and the US despite infusion of funds into the market for short term credit. In the US the Dow dropped 777 points (6.98%), the largest one-day point-drop in history (but only the 17th largest percentage drop).

The U.S. bailout plan, now named the Emergency Economic Stabilization Act of 2008 and expanded to 110 pages was slated for consideration in the House of Representatives on Monday, September 29 as HR 3997 and in the Senate later in the week. The plan failed after the vote being held open for 40 minutes in the House of Representatives, 205 for the plan, 228 against. Meanwhile US stock markets suffered steep declines, the Dow losing 300 points in a matter of minutes, ending down 777.68, the Nasdaq losing 199.61, falling below the 2000 point mark, and the S.&P. 500 off 8.77% for the day. By the end of the day, the Dow suffered the largest drop in the history of the index. The S&P 500 Banking Index fell 14% on September 29 with drops in the stock value of a number of US banks generally considered sound, including Bank of New York Mellon, State Street and Northern Trust; three Ohio banks, National City, Fifth Third, and KeyBank were down dramatically.

On Tuesday, September 30, stocks rebounded but credit markets remained tight with the London Interbank Offered Rate (overnight dollar Libor) rising 4.7% to 6.88%.

On Tuesday, September 30, 9 billion was made available by the French, Belgian and Luxembourg governments to the French-Belgian bank Dexia.

After Irish banks came under pressure on Monday, September 29, the Irish government undertook a two year "guarantee arrangement to safeguard all deposits (retail, commercial, institutional and inter-bank), covered bonds, senior debt and dated subordinated debt (lower tier II)" of 6 Irish banks: Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and the EBS Building Society; the potential liability involved is about 400 billion dollars.

The United States Senate's version of the $700 billion bailout plan, HR1424, modified to expand bank deposit guarantees to $250,000 and to include $100 billion in tax breaks for businesses and alternative energy, passed with bi-partisan support 74-25 on October 1st. Reaction in the House was mixed, but in a vote on Friday the House of Representatives passed the Emergency Economic Stabilization Act of 2008, as refashioned by the Senate, 263-171 in a bipartisan vote.

Discussions were ongoing in Europe regarding possible remedies for financial instability in Europe leading up to a conference Saturday afternoon in Paris hosted by Nicolas Sarkozy, president of France. UniCredit of Italy was reported to be the latest bank to come under pressure. During the night of October 2 Greece followed Ireland's lead and guaranteed all bank deposits.

On October 3 it was reported that Wachovia had rejected the previous offer from Citigroup in favor of acquisition by Wells Fargo, resulting in a legal dispute with Citigroup.

In Britain, the Financial Services Authority announced on October 3 that effective Tuesday, October 7, the amount of the guarantee of bank deposits would be raised to £50,000 from £35,000. On Friday, October 3, the government of the Netherlands took over the Dutch operations of Fortis, replacing the bailout plan of September 28.

Week of October 5

Over the weekend and on Monday a major banking and financial crisis emerged in Iceland with its currency the krona, dropping 30% against the euro. At a meeting on Monday night emergency legislation was passed granting broad powers to the government to seize and regulate banks. The Landsbanki and Glitnir were seized, while Kaupthing was subjected to a rescue plan.

On October 6, the Icelandic Financial Supervisory Authority decided temporarily to suspend from trading on regulated markets all financial instruments issued by Glitnir banki hf., Kaupþing banki hf., Landsbanki Íslands hf., Straumur-Burðarás fjárfestingarbanki hf., Spron hf., and Exista hf.

Before the opening of the business day, October 6. BNP Paribas, the French bank, assumed control of the remaining assets of Fortis following Dutch nationalization of the operations of the bank in The Netherlands. Denmark, Austria, and possibly Germany, joined Ireland and Greece in guaranteeing bank deposits on Monday, October 6. Following this, the FTSE100 index of leading British shares took its worst one-day hit in history . A banking Bill easing rescues is slated for introduction in the British Parliament on Tuesday, October 7. On 6 October German chancellor Angela Merkel pledged that the government would guarantee all German private bank savings. The government also announced a revised bailout plan for German mortgage lender Hypo Real Estate (HRE). On Monday, October 6, the Dow Jones Industrial Average closed below 10,000, a drop of 30% from its high above 14,000 a year earlier on October 9, 2007. In Brazil and Russia trading was suspended on Monday following dramatic drops in their markets.

On October 7, the Icelandic Financial Supervisory Authority took control of Landsbanki. On the same day, the Central Bank of Iceland announced that Russia had agreed to provide a four-billion-euro loan, however this was soon denied by Russian authorities, and the Icelandic Finance Minister had to correct the earlier announcement and now stated that discussions had been initiated with Russia on providing a loan to Iceland. This was also denied by Russian Deputy Finance Minister Dmitry Pankin. Late in the evening, however, Russia's Finance Minister Alexei Kudrin did concede that a request had been received, to which Russia was positive, and that discussions on financial matters would be conducted later in the week when an Icelandic delegation was expected to arrive in Moscow. Standard & Poor's also cut Iceland's foreign-currency sovereign credit rating from A-/A-2 to BBB/A-3 and local-currency sovereign credit rating from A+/A-1 to BBB+/A-2. S&P also lowered Iceland's banking industry country risk assessment from group 5 to group 8, worrying that "In a severe recession scenario, the cumulative amount of nonperforming and restructured loans could reach 35% to 50% of total outstanding loans in Iceland.

On October 7 the Federal reserve announced formation of a Commercial Paper Funding Facilty (CPFF) which will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. Several countries announced new or increased deposit guarantees: Taiwan outlined plans to double the guarantee to NT$3 million ($92,000) and the European Union agreed to increase guarantees across the EU to at least €50,000 per saver. Several EU states then announced increases on top of this minimum: Netherlands, Spain, Belgium, and Greece each announced they would guarantee up to €100,000.

The government of Britain announced on the morning of Wednesday, October 8 that it would make £25 billion available as "Tier 1 capital" (preference share capital or "PIBS" [Permanent Interest-Bearing Securities]) to the following financial institutions: Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered as part of a bank rescue package. An additional £25 billion was scheduled to be made available to other financial institutions, including British subsidiaries of foreign banks. "In reviewing these applications the Government will give due regard to an institution's role in the UK banking system and the overall economy". The plan included increased ability to borrow from the government, offered assistance in raising equity, and a statement of support for international efforts. The plan has been characterized as partial nationalization.

On Wednesday, October 8, the European Central Bank, Bank of England, Federal Reserve, Bank of Canada, Swedish Riksbank and Swiss National Bank all announced simultaneous cuts of 0.5% to their base rates at 11:00 UTC. Shortly afterwards, the Central Bank of the People's Republic of China also cut interest rates. On October 8 there were sharp losses on stock markets worldwide with a loss of over 9% in Japan. Trading was suspended in Russia and Indonesia after steep morning losses. In the United States, following the funds cut by the Federal Reserve, stocks were volatile, finishing down. On October 8 the Federal Reserve loaned AIG $37.8 billion, in addition to the previous loan of $85 billion.

On Wednesday night, October 8, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 króna to the euro after trying to set this peg on Monday, October 6.By Thursday October 9, the Icelandic króna was trading at 340 to the euro when the government suspended all trade in the currency.

On Thursday, October 9, the Icelandic Financial Supervisory Authority took control of the country's biggest bank Kaupþing banki hf.. This occurred when the Kaupthing Board resigned and asked the national authorities to take control. This came about when "Britain transferred control of the business of Kaupthing Edge, its Internet bank, to ING Direct and put Kaupthing's UK operations into administration" placing Kaupthing in technical default according to loan agreements. This marked an escalating row between Iceland and the United Kingdom over the growing crisis. All trade was also suspended on the Iceland Stock Exchange until Monday October 13.

On Thursday, October 9, the one-year anniversary of the Dow's peak, the cost of short term credit rose while there were heavy losses in the United States stock market; the Dow dropped below 8600, reaching a five year low. It was the first time since August 2003 that the Dow closed below 9000; losses were moderate in Europe. The following day, Friday, October 10, there were large losses in Asian and European markets Yamato Life filed for bankruptcy. Beset by falling commodities prices, Russia's stock markets remained closed on October 10. The Russian Parliament passed a plan authorizing lending of $36 billion gained from global oil sales to banks which met creditworthiness requirements. Special attention is being paid to shoring up Rosselkhozbank, the bank which provides credit to the reviving agricultural sector. The amount of funds available is limited due to falling oil prices. The government of the United States, as authorized by the Emergency Economic Stabilization Act, announced plans to infuse funds into banks by purchasing equity interests in them, in effect, partial nationalization, as done in Britain. The Treasury secretary Henry M. Paulson Jr. met Friday in Washington with world financial leaders. A meeting of international financial leaders hosted by President Bush at the White House in Washington is planned on Saturday to attempt to coordinate global response to the financial crisis. The annual meetings of both the International Monetary Fund and World Bank was scheduled to be held in Washington over that weekend.

On Friday, October 10th, stock markets crashed across Europe and Asia. London, Paris and Frankfurt dropped 10% within an hour of trading and again when Wall Street opened for trading. Global markets have experienced their worst weeks since 1987 and some indexes, S&P 500, since the Wall Street Crash of 1929. [2]

On October 10th, within the first five minutes of the trading session on Wall Street, the Dow Jones Industrial Average plunged 697 points, falling below 7900 to its lowest level since March 17, 2003. Later in the afternoon, the Dow made violent swings back and forth across the breakeven line, toppling as much as 600 points and rising 322 points. The Dow ended the day losing only 128 points, or 1.49%. Trading on New York Stock Exchange closed for the week with the Dow at 8,451, down 1,874 points, or 18% for the week, and after 8 days of losses, 40% down from its record high October 9, 2007. Trading on Friday was marked by extreme volatility with a steep loss in the first few minutes followed by a rise into positive territory, closing down at the end of the day. In S&P100 some financial corporate showing signals upwards also. President George W. Bush reassured investors that the government will solve the financial crisis gripping world economies.

The bonds of the bankrupt Lehman Brothers were auctioned on Friday, October 10. They sold for a little over 8 cents on the dollar. Many of the bonds of Lehman Brothers were insured with credit default swaps. There is apprehension that payments to the holders of Lehman bonds may severely damage the firms or hedge funds which issued the swaps. Anticipated claims are estimated to be several hundred billion dollars.

As meetings proceeded with global financial leaders in Washington on Saturday, October 11, the United States government announced a change in emphasis in its rescue efforts from buying illiquid assets to recapitalizing banks, including strong banks, in exchange for preferred equity; and purchase of mortgages by Fannie Mae and Freddie Mac. These remedies can be put into effect quicker than the prior plan which was estimated to take a month to set into operation.

Week of October 12

On Sunday the British government was in negotiations with Royal Bank of Scotland, HBOS, Lloyds TSB and Barclays, major British banks, regarding recapitalization which would give the British government a substantial equity interest. An investment of more than 37 billion pounds is contemplated. Some purchases would be common stock with existing shareholders given a right of first refusal (the government would only purchase the shares if existing shareholders did not). Previously announced recapitalization plans contemplated only purchases of preferred equity without government participation in governance of the banks, however, as the financial emergency has rapidly developed, more aggressive measures are being advanced. On Sunday, October 12, European leaders, meeting in Paris, led by France and Germany, announced recapitalization plans for Europe's banks. Plans were announced to guarantee bank deposits for five years. European countries would finance their own rescue plans and tailor them to local conditions. Mechanisms are also planned to increase the availability of short term credit. The total rescue plan totaled 1 trillion euros. Australia and New Zealand also announced bank guarantee plans. On Monday, October 13, the markets were closed in Japan and the bond market was closed in the United States.

On Sunday, in Norway, which is not in the euro zone, the Norwegian cabinet in a hastily called press conference announced a US$57.4 billion (350 billion Norwegian kroner) plan of offering Norwegian banks new government bonds. This came three days ahead of Wednesday's hastened interest rate meeting at Norges Bank to decide whether or not to announce rate cuts similar to the coordinated cuts of October 8. Central bank Governor Svein Gjedrem also made critical comments about some of the measures that had been implemented already by other countries, among them the concerted rate cuts which he said "was a strong card, which had a two-hour impact". He further commented that "It's important to be careful with measures – so that one addresses the problems one really faces," and he also emphasized that acting at the right time was important saying "there are unusually many examples that show one can do too much too early." He cited the Icelandic government's takeover of banks as an example of quick action with no guarantee that the problems would be solved.

The G7 nations, at their meeting in Washington over the weekend pledged to "support systemically important financial institutions and prevent their failure". This decision is based on analysis of the consequences of the bankruptcy of Lehman Brothers which resulted in the loss of funds by other financial institutions. It is thought that those losses may have triggered a tightening of the credit crunch as banks ceased to lend to one another. No enforceable mechanism was created to support the pledge, but it is believed to extend to major firms such as Morgan Stanley and Goldman Sachs.

On October 13 stock markets worldwide rose with the Dow Jones industrial average showing a 400 point leap at the start of trading. At the close of trading the average was up 936 points, a record climb, up 11%, closing above 9,000 at 9,387. After announcement in France of a 320 billion euro rescue and guarantee plan, French CAC40 rose by 11.18% within the day.. Germany announced a 400 billion euro plan. On Monday the International Monetary Fund offered possible technical and financial aid to Hungary which has suffered during the crisis due to the flight of investors to euro and dollar denominated investments. As in the rest of the world, on Monday stock prices rose on the Hungarian exchange and pressure on the national currency, the forint eased. The forint has dropped 30% against the dollar since July. The prime minister of Spain, Jose Luis Rodriguez Zapatero, announced that Spain would provide up to €100 billion of guarantees for new debt issued by commercial banks in 2008. This plan followed a meeting at the eurozone summit over the weekend to try to develop a coordinated effort to combat the credit crisis. The UK government started the nationalization process by injecting £37 billion in the nation’s three largest banks. The UK government would end up owning a majority share in the Royal Bank of Scotland (RBS) and over a 40% share in Lloyds and HBOS. In return for the bailout, the banks agreed to cancel dividend payments until the loans are repaid, have board members appointed by the Treasury, and limit executive pay. The European Central Bank attempted to revive credit market by weekly injections of unlimited euro funds at an interest rate of 3.75%. The ECB president, Jean-Claude Trichet, was also contemplating relaxing the collateral standards to make the funds more accessible to banks. Following its European partners, Italy pledged to intervene as necessary to prevent any bank failures in its country. Finance minister, Giulio Tremonti, said Italy would guarantee new bank bonds of up to 5 years until the end of 2009 and the Bank of Italy would provide €40 billion in treasury bills to banks to refinance inferior assets that can not be currently used as collateral. In coordination with other eurozone countries, the Dutch government announced that it would guarantee interbank lending up to €200 billion. This followed the set up of a €20 billion Dutch fund to help recapitalize banks and insurers.

On Tuesday the United States announced a plan to take an equity interest of $250 billion in US banks with 25 billion going to each of the four largest banks. The 9 largest banks in the US: Goldman Sachs, Morgan Stanley, J.P. Morgan, Bank of America, Merrill Lynch, Citigroup, Wells Fargo, Bank of New York Mellon and State Street were called in to a meeting on Monday morning and pressured to sign; all eventually agreed. The plan will be open to any bank for 30 days. The equity interests purchased by the government are preferred shares that pay 5% but rise to 9% after 5 years; it is expected that the companies will repurchase this interest when they can raise private capital to do so. The plan also includes an option allowing the government to purchase common stock according to a formula which could return substantial profit to the taxpayers should the stock price of the companies substantially appreciate. The total liability assumed is $2.25 trillion including a $1.5 trillion guarantee of new senior debt issued by banks and a $500 billion guarantee of deposits in noninterest-bearing accounts (business accounts used to pay current obligations such as payroll). The theory is that with additional capitalization and the guarantees, banks will be willing to resume a normal lending pattern with each other and borrowers.

Also on that day, United Arab Emirates’ (UAE) ministry of finance added a $19 billion liquidity injection to domestic banks bringing the total dollars injected to $32.7 billion. The UAE central bank offered 13.6 billion in liquidity to help domestic banks in September. To protect local deposits, the UAE government guaranteed all deposits and interbank lending. Japan announced a plan that will help steady the Japanese market and avoid the worse of the credit crisis. Among the measures included are lifting restrictions on companies buying back their shares, strengthening disclosure on short selling, and the temporary suspension of the sale of government-owned stocks. The Australian government unveiled a $10.4 billion stimulus package. The Economic Security Strategy is designed to help pensioners, low and middle income families, and first time home buyers withstand the credit crisis and global economic slowdown. This followed the Australian government announcing that it would guarantee all bank deposits for three years, guarantee all term wholesaling funding by Australian banks in international markets and double its planned purchase of residential mortgage backed securities. The Icelandic stock exchange began trading again after a three day shutdown. The opening did not include Iceland’s three largest banks which were nationalized last week.

On Wednesday, October 15, the London stock exchange FTSE 100 fell substantially, surrendering over 314 points to slip down 7.16 percent. The losses precipitated more losses in the U.S., as the Dow Jones Industrial Average suffered its largest drop in terms of percentage since 1987, falling over 733 points. The NASDAQ plunged almost eight and a half percent, and the Standard & Poor collapsed down over nine percent.

On October 16, a rescue plan was announced for the Swiss banks UBS and Credit Suisse. Recapitalization involved Swiss government funds, private investors, and the sovereign wealth fund of Qatar. A Swiss agency was set up to purchase and workout toxic funds. UBS had suffered substantial withdrawals by domestic Swiss depositors but still reported profits; Credit Suisse has reported losses. Most large banks in the United States continued to report large losses.

Key risk indicators in September 2008

The TED spread – an indicator of credit risk – increased dramatically during September 2008.

Key risk indicators became highly volatile during September 2008, a factor leading the U.S. government to pass the Emergency Economic Stabilization Act of 2008. The “TED spread” is a measure of credit risk for inter-bank lending. It is the difference between: 1) the risk-free three-month U.S. treasury bill rate; and 2) the three-month London InterBank Offered Rate (LIBOR), which represents the rate at which banks typically lend to each other. A higher spread indicates banks perceive each other as riskier counterparties. The t-bill is considered "risk-free" because the full faith and credit of the U.S. government is behind it; theoretically, the government could just print money so that the principal is fully repaid at maturity. The TED spread reached record levels in late September 2008. The diagram indicates that the Treasury yield movement was a more significant driver than the changes in LIBOR. A three month t-bill yield so close to zero means that people are willing to forgo interest just to keep their money (principal) safe for three months – a very high level of risk aversion and indicative of tight lending conditions. Driving this change were investors shifting funds from money market funds (generally considered nearly risk free but paying a slightly higher rate of return than t-bills) and other investment types to t-bills. These issues are consistent with the September 2008 aspects of the subprime mortgage crisis which prompted the Emergency Economic Stabilization Act of 2008 signed into law by the U.S. President on October 2, 2008.

In addition, an increase in LIBOR means that financial instruments with variable interest terms are increasingly expensive. For example, car loans and credit card interest rates are often tied to LIBOR; some estimate as much as $150 trillion in loans and derivatives are tied to LIBOR. Higher interest rates place additional downward pressure on consumption, increasing the risk of recession.

Global responses

Responses by the UK and US in proportion to their GDPs

On September 15, 2008 China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month.

In Taiwan, the central bank on September 16, 2008 said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreign-currency interbank market the same day. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008 and the Reserve Bank of Australia added $3.45 billion the same day. The European Central Bank injected $99.8 billion in a one-day money-market auction. The Bank of England pumped in $36 billion. Altogether, central banks throughout the world added more than $200 billion from the beginning of the week to September 17.

On September 29, 2008 the Belgian, Luxembourg and Dutch authorities partially nationalized Fortis. The German government bailed out Hypo Real Estate.

U.S. responses

The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program. Part of the announcements included temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board. The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.

Loans to banks for asset-backed commercial paper

How money markets fund corporations

During the week ending September 19, 2008, money market mutual funds had begun to experience significant withdrawals of funds by investors. This created a significant risk because money market funds are integral to the ongoing financing of corporations of all types. Individual investors lend money to money market funds, which then provide the funds to corporations in exchange for corporate short-term securities called asset-backed commercial paper (ABCP). However, a potential bank run had begun on certain money market funds. If this situation had worsened, the ability of major corporations to secure needed short-term financing through ABCP issuance would have been significantly affected. To assist with liquidity throughout the system, the Treasury and Federal Reserve Bank announced that banks could obtain funds via the Federal Reserve's Discount Window using ABCP as collateral.

Federal Reserve actions to lower interest rates and stimulate the economy

Federal reserve rates changes ( Just data after January 1, 2008 )
Date	Discount rate	Discount rate	Discount rate	Fed funds	Fed funds rate
		Primary	Secondary
	rate change	new interest rate	new interest rate	rate change	new interest rate
Oct 8, 2008*	-.50%	1.75%	2.25%	-.50%	1.50%
Apr 30, 2008	-.25%	2.25%	2.75%	-.25%	2.00%
Mar 18, 2008	-.75%	2.50%	3.00%	-.75%	2.25%
Mar 16, 2008	-.25%	3.25%	3.75%
Jan 30, 2008	-.50%	3.50%	4.00%	-.50%	3.00%
Jan 22, 2008	-.75%	4.00%	4.50%	-.75%	3.50%

- * Part of a coordinated global rate cut of 50 basis point by main central banks. [3]

- See more detailed US federal discount rate chart: [4]

Legislation

Main article: Emergency Economic Stabilization Act of 2008

The Secretary of the United States Treasury, Henry Paulson and President George W. Bush proposed legislation for the government to purchase up to US$700 billion of "troubled mortgage-related assets" from financial firms in hopes of improving confidence in the mortgage-backed securities markets and the financial firms participating in it. Discussion, hearings and meetings among legislative leaders and the administration later made clear that the the proposal would undergo significant change before it could be approved by Congress. On October 1, a revised compromise version was approved by the Senate with a 74-25 vote, the sole Senator not to vote was cancer-stricken Ted Kennedy of Massachusetts. The bill, HR1424 was passed by the House on October 3, 2008 and signed into law.

Fed response

In an effort to increase available funds for commercial banks and lower the fed funds rate, on September 29 the U.S. Federal Reserve announced plans to double its Term Auction Facility to $300 billion. Because there appeared to be a shortage of U.S. dollars in Europe at that time, the Federal Reserve also announced it would increase its swap facilities with foreign central banks from $290 billion to $620 billion.

UK Responses

On the 8th October 2008 the British Government announced a bank rescue package of around £500 billion. The plan comprises three parts: Firstly £200 billion will be made available to the banks in the Bank of England's Special Liquidity scheme. Secondly the Government will increase the banks market capitalisation, through the Bank Recapitalisation Fund, with an initial £25 billion and another £25 billion to be provided if needed. Thirdly the Government will temporarily underwite any eligble lending between british banks up to around £250 billion.

Literature

General perspectives

• Vincent Barnett, Kondratiev and the Dynamics of Economic Development. London: Macmillan, 1998.
• Edward Cheung, Baby Boomers, Generation X and Social Cycles. Toronto: Longwave Press, 1994, 2007.
• Gernot Kohler and Emilio José Chaves (Editors) “Globalization: Critical Perspectives” Haupauge, New York: Nova Science Publishers (http://www.novapublishers.com/) ISBN:1-59033-346-2. With contributions by Samir Amin, Christopher Chase Dunn, Andre Gunder Frank, Immanuel Wallerstein
• Ernest Mandel, "The Economics of Neocapitalism", in The Socialist Register, 1964.
• Ernest Mandel, Long waves of capitalist development: the Marxist interpretation (Alfred Marshall Lectures, 1979).
• Chris Freeman and Francisco Louca, As Time Goes By. From the Industrial Revolutions to the Information Revolution. Oxford: OUP, 2001. ISBN 978-0199251056
• Solomos Solomou, Phases of Economic Growth, 1850–1973: Kondratieff Waves and Kuznets Swings (1990).
• Joshua Goldstein, Long Cycles: Prosperity and War in the Modern Age. New Haven, Yale University Press, 1988.
• Murray Rothbard, "The Kondratieff Cycle: Real or Fabricated?". Ludwig von Mises Institute, 1984.
• Turchin, P., et al., eds. (2007). *History & Mathematics: Historical Dynamics and Development of Complex Societies. Edited by Peter Turchin, Leonid Grinin, Andrey Korotayev, and Victor C. de Munck. Moscow: KomKniga, 2006. ISBN 5484010020
• Grinin L., Munck V. C. de, Korotayev A. History and mathematics: Analyzing and Modeling Global Development
• Arno Tausch and Christian Ghymers (2007), "From the 'Washington' Towards a 'Vienna Consensus'? A Quantitative Analysis on Globalization, Development and Global Governance" Haupauge, New York: Nova Science Publishers
• Cesare Marchetti, "Fifty-Year Pulsation in Human Affairs, Analysis of Some Physical Indicators," Futures, vol. 17, no. 3 (1986): 376-88.
• Theodore Modis, Predictions: Society's Telltale Signature Reveals the Past and Forecasts the Future, Simon & Schuster, New York, 1992, Chapter 8.
• "Kondratieff waves" on faculty.washington.edu (The Evolutionary World Politics Homepage).
• "Kondratieff theory explained" on Kondratyev.com (Kondratyev Theory Letters).
• "Kondratieff wave"

Most recent aspects

• Successes of the International Monetary Fund : untold stories of cooperation at work / edited by Eduard Brau and Ian McDonald. New York : Palgrave Macmillan, 2009. ISBN: 9780230203136 ISBN: 0230203132

• Lessons from the Asian financial crisis / edited by Richard Carney. New York, NY : Routledge, 2009. ISBN: 9780415481908 (hardback) ISBN: 0415481902 (hardback) ISBN: 9780203884775 (ebook) ISBN: 0203884779 (ebook)

• Funnell, Warwick N. In government we trust : market failure and the delusions of privatisation / Warwick Funnell, Robert Jupe and Jane Andrew. Sydney : University of New South Wales Press, 2009. ISBN: 9780868409665 (pbk.)

• Globalization and health : pathways, evidence, and policy / edited by Ronald Labonté ... [et al.]. New York : Routledge, 2009. ISBN: 9780415993340 (hbk.) ISBN: 0415993342 (hbk.)

• Read, Colin, 1959- Global financial meltdown : how we can avoid the next economic crisis / Colin Read. New York : Palgrave Macmillan, c2009. ISBN: 9780230222182

• Weikart, Lynne A., 1943- Follow the money : who controls New York City mayors? / Lynne A. Weikart. Albany : State University of New York Press, c2009. ISBN: 9781438425313 (hardcover : alk. paper) ISBN: 9781438425320 (pbk. : alk. paper)

• Zandi, Mark M. Financial shock : a 360° look at the subprime mortgage implosion, and how to avoid the next financial crisis / Mark Zandi. Upper Saddle River, N.J. : FT Press, c2009. Description: 270 p. : ISBN: 0137142900 (hardback : alk. paper) ISBN: 9780137142903 (hardback : alk. paper) 2830026

• The American housing crisis / Susan Hunnicutt, book editor. Farmington Hills, MI : Greenhaven Press, c2009. ISBN: 9780737743104 (hbk.) ISBN: 9780737743098 (pbk.)

• United States. Congress. House. Committee on the Judiciary. Subcommittee on Commercial and Administrative Law. Working families in financial crisis : medical debt and bankruptcy : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Tenth Congress, first session, July 17, 2007. Washington : U.S. G.P.O. : For sale by the Supt. of Docs., U.S. G.P.O., 2008. 277 p. : ISBN: 9780160813764 ISBN: 016081376X http://purl.access.gpo.gov/GPO/LPS99198

• Lowenstein, Roger. While America aged : how pension debts ruined General Motors, stopped the NYC subways, bankrupted San Diego, and loom as the next financial crisis / Roger Lowenstein. New York : Penguin Press, 2008. 274 p. ; ISBN: 9781594201677 ISBN: 1594201676

• Ghilarducci, Teresa. When I'm sixty-four : the plot against pensions and the plan to save them / Teresa Ghilarducci. Princeton : Princeton University Press, c2008. 374 p. ; ISBN: 9780691114316 (hbk. : alk. paper)

• Robertson, Justin, 1972- US-Asia economic relations : a political economy of crisis and the rise of new business actors / Justin Robertson. Abingdon, Oxon ; New York, NY : Routledge, 2008. ISBN: 9780415469517 (hbk.) ISBN: 9780203890523 (ebook)

• García, José, 1975- Up to our eyeballs : how shady lenders and failed economic policies are drowning Americans in debt / José García, James Lardner, and Cindy Zeldin ; with assistance from Myra Batchelder and Jennifer Wheary. New York : The New Press : Published in collaboration with Demos ; New York : Distributed by W.W. Norton, 2008. xii, 223 p. ; ISBN: 9781595582119 (hbk.) ISBN: 1595582118 (hbk.) 2563707

See also

• Nikolai Kondratiev
• Kondratiev waves
• world systems theory
• Andre Gunder Frank
• 2008 Russian financial crisis
• Collateralized debt obligation
• Credit derivative
• Emergency Economic Stabilization Act of 2008
• Margin call
• Mark to market
• Subprime mortgage crisis
• 2008 Icelandic financial crisis

External links

• Stern on Finance New York University Stern School of Business on the Financial Crisis.
• "How This Bear Market Compares" Multimedia The New York Times
• RGE Monitor
• Commercial Paper Rates and Outstanding (Federal Reserve Bank)