The Financial Crisis
What is the financial crisis all about? A basic overview
Since 2007, the U.S. and global economies have struggled through the worst financial crisis since the Depression of the 1930s. Major businesses have failed; large American and European banks were forecast to lose roughly $2.8 trillion between 2007 and 2010; the S&P 500, a major stock index, fell 45% from its high in 2007; and more than $8 trillion in wealth was erased between the height of the stock market and November 2008. (Americans’ total net worth shrank by about 25%.) Unemployment reached the highest levels in 15 years; more than a million families have lost their homes to foreclosure; and many nations’ governments, including ours, have spent billions to keep banks and other businesses afloat. While there are signs of recovery, including a partial recovery in stock prices, the world still seemed to be in the grip of persistent recession as of summer, 2011.
Stages in the crisis
The financial crisis has unfolded in overlapping stages.
• The mortgage crisis. Low interest rates in the early 2000s encouraged many Americans to buy homes. As a result of the increased demand, home prices more than doubled during the decade ending in 2006, leading to a widespread belief that real estate prices would continue to rise indefinitely. Investors from around the world, eager to profit from this steady price climb, bought new investment products tied to mortgages. So many people wanted to invest in these products that, in order to satisfy them, more and more mortgages had to be sold.
But the number of would-be home-buyers with good credit was limited. Banks therefore relaxed their lending standards, and encouraged people who would have been turned down for loans a few years earlier to borrow more than they could afford, or to take out adjustable rate mortgages with low initial interest rates but automatic rate increases that not all customers understood. Many of these borrowers couldn’t keep up with their payments. When home prices eventually fell, some people found that they owed more on their mortgages than their houses were worth; many responded by stopping their payments.
By September 2009, more than 14% of all mortgage borrowers in the U.S. were either behind on their payments or else in foreclosure. Real estate values fell in neighborhoods ravaged by foreclosure, and the banks ended up owning more homes than they could sell. More than 100 mortgage lenders went bankrupt in 2007 and 2008. The decline in home values resulted in heavy losses for investors around the world, and severely damaged financial institutions left with mortgage-related securities they could no longer sell. In 2009, President Obama created a $75 billion plan to help up to nine million homeowners refinance their mortgages or avoid foreclosure—but, as of April, 2010, only 170,000 households had had their mortgages adjusted.
• The credit crunch. Before the housing bubble burst, Americans took on more debt than ever before, in the form of mortgages, home equity loans, car loans, and credit card debt. The biggest investment banks took on more debt, too—making them more vulnerable when the economy took a downturn. As more people failed to pay back their loans, mortgage-related investments lost value. Lenders found themselves with much less money to lend; it became harder for businesses and individuals to get loans, which slowed economic activity in general. In response, the Federal Reserve (the central bank of the U.S.) cut its base interest rate to nearly 0%, and the government lent billions to banks to enable them to start lending again. The government neglected to require that the funds be used for lending, however, and many banks used the money instead to pay debts and acquire other businesses.
• Bailouts for companies “too big to fail.” In September, 2008, Treasury Secretary Henry Paulson and N.Y. Federal Reserve President Timothy Geithner met with legislators and proposed a $700 billion emergency bailout, to pump money into the system and avert economic catastrophe. After initial defeat in the House of Representatives, the Emergency Economic Stabilization Act (also known as the Troubled Asset Relief Program, or TARP) was passed by Congress and signed into law by President Bush. At the same time, the Big Three American auto manufacturers—GM, Ford, and Chrysler—came close to bankruptcy. (The main reasons: fewer people were buying new cars, and many of those who did chose smaller, more fuel-efficient foreign cars; and Detroit’s labor costs, including the cost of pensions for retired workers, far exceed those of its foreign competitors.)
In order to protect these companies from going out of business (which would have cost up to 3 million jobs and undermined confidence in the entire U.S. economy), the federal government lent GM and Chrysler billions of dollars and forced them to undergo restructuring. The financial crisis became President Obama’s first priority once he took office. Congress passed his $787 billion stimulus proposal in February, 2009—with only three Republican votes in the Senate, and none in the House of Representatives.
• Global recession: The crisis has spread far beyond our borders. Several European banks invested heavily in mortgage-backed securities, and their losses put some of them out of business. Many countries have turned to the International Monetary Fund, an agency of the U.N., for emergency aid. All around the world, lack of money available for loans has resulted in shrinking economic activity, reduced demand for goods, and lost jobs. The U.S., China, and other countries responded with stimulus plans in 2009, hoping to revive their economies with an infusion of funds. Many central banks cut interest rates almost to zero, following the lead of the U.S. Federal Reserve.
In late 2009, Greece’s new prime minister announced that his country’s deficit was three times the size his predecessor had admitted. Other southern European nations, including Spain, Italy, and Portugal, had also overborrowed while interest rates were low, and found themselves in trouble when the global economy soured. The more stable economies of northern Europe resisted bailing out the debt-ridden south; but in May, 2010, the European Union’s Parliament approved loan packages worth nearly $1 trillion to help the economies in trouble. The results remain to be seen.
• Uncertainty: Major American banks were earning profits again in 2009; by April, 2010, recipients of bailout funds had paid back all but $89 billion. As of May, 2011, the Dow Jones Industrial Average (an index of the stock prices of some of America’s biggest companies) had regained 5,600 of the 7,000 points it lost between October, 2007 and February, 2009. General Motors and Chrysler escaped bankruptcy, and Ford posted profits in 2009 and 2010 without a bailout. But credit remained tight for smaller borrowers, and unemployment hovered above 9% from July 2009 to July 2010, the highest levels since 1983. Two urgent imperatives are now in conflict: the need to stimulate the economy and pull the country out of recession, and the need to begin rolling back a deficit that stood at more than $14 trillion by August, 2011. Though most economists agree that more government spending is needed, the budget agreement passed in August, 2011 (see the News-Basics article on the Debt Ceiling) includes trillions of dollars in spending cuts.
Recent developments
• 9/17/10: The Census Bureau reports that 44 million Americans (1/7 of the U.S. population) were living in poverty in 2009—the highest percentage since 1994. Poverty is defined as a pre-tax income of $22,050 for a family of four. See this New York Times article for more.
• 9/21/10: The New York Times reports that the recession officially ended in June, 2009, according to the Business Cycle Dating Committee of the National Bureau of Economic Research. Many measures of economic activity have increased since then… but unemployment has not let up, making the recovery hard for most Americans to perceive.
• 10/13/10: “Across the U.S., a Long Recovery Looks Much Like a Recession,” New York Times: outlines symptoms of a very slow recovery. The climb back to financial health may take years.
• October, 2010: The Foreclosure Mess. During the mortgage boom years of 2005-2007, banks handled documents so carelessly that foreclosures may now be stalled, as lawyers for lenders and borrowers clash over whether or not the proceedings can go forward. Some lenders never showed they had a legal right to foreclose; some employees admit they signed foreclosure documents without reading them. See this Associated Press story that explains the mess.
• 1/26/11: A federal commission has concluded that the financial crisis could have been avoided. The commission’s report criticizes former Federal Reserve Chairman Alan Greenspan, an advocate of deregulation, for failing to halt the widespread sale of questionable mortgages, and charges that regulators lacked the will to properly oversee Wall Street firms engaged in risky practices. The report also points to recklessness and incompetence at mortgage lenders and banks as important causes of the crisis. For more, see this New York Times article.
• 1/27/11: The three Republicans on the federal commission studying the financial crisis have issued dissenting reports, calling the majority report’s analysis “too broad.” For more, go here.
• 3/18/11: The F.D.I.C. (Federal Deposit Insurance Corporation, the government agency that guarantees bank deposits) has sued three top executives at Washington Mutual for reckless lending that led to the collapse of WaMu, the biggest savings bank in the U.S., in 2008. This is the first suit filed by the F.D.I.C. against a major bank’s CEO. For more on the story, see the New York Times.
• 3/21/11: After a period of guarded optimism about recovery, the upheaval in the Arab world and the disaster in Japan have created new uncertainty for both the global and domestic economies.
• 4/13/11: A bipartisan Senate committee has released a 650-page report on the financial crisis. The report finds that major companies “deceived their clients and deceived the public, and they were aided and abetted by deferential regulators and credit ratings agencies who had conflicts of interest.” The report asks federal regulators to study its findings for violations of law.
• 4/20/11: In one of the few successful prosecutions to come out of the financial crisis, Lee B. Farkas has been found guilty of 14 counts of fraud and conspiracy. The $2.9 billion fraud led to the collapse of mortgage lender Colonial Bank in 2009. Farkas now faces a possible prison sentence. For more, see the New York Times.
Pointing fingers
Economists, journalists, and politicians have found many culprits to blame for the financial crisis.
Here are some often-named contributing factors:
• Deregulation of banks, starting with President Reagan in 1982 and continuing with President Clinton in 1999, allowed banks to move into new business areas. The conservative culture of traditional banks gave way to more aggressive (and risky) pursuit of profits.
• Lack of federal regulation of financial markets. As investment banks invented new financial products, federal regulators failed to keep pace, and did little or nothing to restrain the most risky practices.
• The S.E.C. (Securities and Exchange Commission) relaxed its net capital rule in 2004, allowing the five biggest investment banks to take on much more debt. This led to expanded sales of mortgage-backed securities, and the ensuing disaster.
• Credit rating agencies, such as Moody’s and Standard & Poor’s—which rate the relative safety of certain investments—failed to accurately assess the risks involved in mortgage-backed securities. Investors therefore had no warning of the risk they were taking. (Critics point out that the rating agencies have a conflict of interest, because they’re paid by the same companies they rate.)
• The reckless pursuit of profit by major financial institutions led them to underestimate the risks.
• Policy errors by the Federal Reserve under former Chairman Alan Greenspan. After technology stocks crashed in 2000, the Fed lowered interest rates to stimulate the economy. Many attribute the housing bubble directly to these low rates.
• Note: The push to expand home-ownership in minority communities, starting under President Carter, has been blamed for the subprime mortgage crisis, but this accusation has been discredited. Go here for a detailed explanation.)
Big bonuses at bailed-out banks
Major financial companies that had accepted bailout funds from the government aroused widespread anger when they handed out more than $2 billion in bonuses and other payments at the end of 2008. The firms included Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America, Citigroup, and AIG, among others. Though AIG had accepted $173 billion in government bailouts, its executives received $165 million in bonuses—73 of them worth a million dollars or more. (The Treasury Secretary pleaded with the company’s CEO to take back the bonuses, but the CEO replied that the payments were necessary if the company was to attract and retain the best personnel.) Most of the companies later paid back all of the bailout funds plus interest, so the government had no legal power to overturn the bonus payments. (For more, see this New York Times article.)
Why haven’t any CEOs gone to jail?
Considering the conflicts of interest involved (for example, investment banks betting against securities they recommended to clients, and profiting while clients lost), observers ask why no financial executives have been prosecuted. (During the late 1980s, after many deregulated savings and loan institutions failed, more than 800 bank officials went to jail.) A New York Times article reports that criminal intent is hard to prove, and that bank regulators haven’t referred as many cases to criminal investigators as they did in the past. The article points out questionable activities that prosecutors could still investigate.
What has the government done to respond to the crisis?
For a chart outlining federal spending to rescue and revive the economy, see CNNMoney.com’s Bailout Scorecard.
A handful of numbers
Snapshots of the Dow Jones Industrial Average:
10/07: 13,930
2/09: 7,062
4/11: 12,810
U.S. unemployment figures
2007: 4.6%
2008: 5.8%
2009: 9.3%
2010: 9.6%
July, 2011: 9.1%
Government officials prominent in the crisis
• Ben Bernanke: Chairman of the Federal Reserve under both Presidents Bush and Obama, Bernanke was credited by Obama with helping to avert another Great Depression in 2008. He was criticized, however, for his role in Bank of America’s acquisition of Merrill Lynch and in the bailout of AIG. (See this Wikipedia article for details.)
• Timothy Geithner: current Secretary of the Treasury. Geithner has played a major role in distributing federal bailout funds, devising financial reforms, and helping the mortgage and auto industry recover. Formerly President of the Federal Reserve Bank of N.Y., he has been accused of doing too much for Wall Street and too little for “Main Street,” i.e., small business owners and ordinary citizens. There is a common misconception that Geithner, like many other government officials, once worked at Goldman Sachs; it’s not true.
• Henry Paulsen: Treasury Secretary under President George W. Bush, 2006-2009, and former CEO of Goldman Sachs. Paulsen led the government’s efforts to rescue financial institutions from failing in 2008.
The Federal Reserve and interest rates
Commercial lending rates rise or fall when the U.S. Federal Reserve raises or lowers its Fed Funds rate. Lower interest rates encourage people to borrow money—to buy houses, cars, and consumer goods, and to start businesses—and therefore stimulate economic activity. They can also lead to inflation, however. Higher interest rates act as a brake on the economy, but can curb inflation. The stock market closely watches the monthly meetings at which the Fed Funds rate is set; even a small decrease or increase will send the market up or down, based on expectations that the economy will grow or slow down. Between 9/07 and 12/08, the Fed lowered its interest rate ten times, from 5.25% to between 0% and .25%. (As of 9/10, the rate stood at 0.25%.)
What’s the difference between a recession and a depression?
• The most often-cited definition of recession is a drop in Gross Domestic Product for two or more consecutive quarters. (In business, the year is divided into four quarters, three months apiece.)
• Economists point out, though, that this definition ignores other important indicators of recession, such as changes in unemployment figures and consumer confidence.
• In a recession, unemployment goes up, and consumer spending goes down, along with the value of most companies’ stock.
• A depression, simply put, is a longer-lasting recession, with a greater decline in business activity.
• A more precise definition: a depression is an economic downturn in which real Gross Domestic Product declines by at least 10%. By this standard, the last true depression ended in 1938.
• An economists’ joke: A recession is when your neighbor loses his job. A depression is when you lose yours.
For more on recessions and depressions, go here.
Financial reform legislation
In July, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, the broadest revision of financial regulation in the U.S. since the Great Depression. The bill puts more types of financial businesses and products under federal regulation… creates a council of regulators who will monitor the financial system for potential problems… gives regulators the power to direct large financial institutions that get in trouble, or to dismantle them if they pose a threat to the nation’s financial health… creates a new Consumer Protection Agency to protect buyers of financial products… requires that most trading in derivatives take place in open marketplaces, so that buyers can compare prices… requires banks to separate their derivative-trading departments from the rest of their operations… and limits banks’ freedom to trade for their own benefit. (For more on the legislation, see this overview from the New York Times.)
Opinions
Paul Krugman, “Why We Regulate,” New York Times, 5/14/12: “…businessmen are human… and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on.
Eduardo Porter, “Stimulus Is Maligned, but Options Were Few,” New York Times, 2/29/12: “[T]here is a term in chess called an ‘only move,’ a move forced by circumstance — the only one available to avoid immediate defeat. The Obama administration’s efforts to stimulate the sagging economy… fit that description. It is unlikely that Republicans would have done much differently.”
Joe Nocera, “Keep It Simple,” New York Times, 1/17/12: Are the new Dodd-Frank banking regulations too complex and cumbersome, as bankers say? Maybe.
George Soros, interviewed in the New York Review of Books, 5/15/08, commented on the crisis as it unfolded. Here’s how Soros, an investor, philanthropist, and liberal activist, answered the question “Was this crisis avoidable?”:
“I think it was… Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it’s generally the intervention of the authorities that saves the markets when they get into trouble… you have to find the right kind of balance between allowing the markets to do their work, while recognizing that they are imperfect.”
David Brooks, “Greed and Stupidity,” New York Times, 4/2/09: What really caused the financial crisis? Was it Wall Street’s greed, or that bankers didn’t understand the risks they were taking? Brooks lays out the arguments on both sides.
Malcolm Gladwell, “Cocksure,” New Yorker, 7/27/09: Perhaps the cause was Wall Street leaders’ overblown self-confidence, which led them to believe they couldn’t fail.
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Was Obama’s stimulus bill too big, too small, too liberal, too conservative, or just right?
Michael Boskin, “Summer of Economic Discontent,” Wall Street Journal, 9/2/10: Boskin, an economics professor at Stanford and Chairman of the Council of Economic Advisors under President George H.W. Bush, argues that President Obama’s efforts to fight the recession have failed, and that further liberal action on the economy would be disastrous.
David Leonhardt, “Judging Stimulus by Job Data Reveals Success,” New York Times, 2/16/10: states that Obama’s bill did what it was meant to do, and averted far greater economic disaster, even if high unemployment makes many people think it failed.
Paul Krugman, “The Economic Narrative,” New York Times blog, 9/1/10: argues that a much bigger program was needed, one more oriented toward spending. (See also Krugman’s op-ed, “Behind the Curve,” from 3/8/09.)
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David Stockman, “Four Deformations of the Apocalypse,” New York Times, 7/31/10: Stockman, Director of the Office of Management and Budget under President Reagan, criticizes current Republican economic policies, which he says have deformed the national economy.
“Triumph of the Regulators,” Wall Street Journal editorial, 6/28/10: a conservative critique of the financial reform bill.
“Now, the Rules,” New York Times editorial, 8/23/10: warns that Congress needs to closely monitor the regulators who will translate the financial reform bill into specific rules, because those regulators have a history of “putting the financial industry first and consumer protection second.”
• William D. Cohan, “Make Wall Street Risk It All,” New York Times, 10/8/10: According to Cohan, the financial crisis wouldn’t have happened if Wall Street firms had remained partnerships (as they were before 1970) instead of becoming corporations. In a partnership, the partners’ own money is on the line, and they would never have made the kind of reckless bets that led to the crisis. Cohan recommends preventing future financial disasters by once again linking partners’ personal wealth with their firms’ profits and losses.
Matt Taibbi, “Why Isn’t Wall Street in Jail?” Rolling Stone, 2/16/11
For more information
The New York Times on the credit crunch
“The Giant Pool of Money”: an episode of This American Life on NPR, broadcast 5/9/08
“Inside Job,” an Academy Award-winning documentary
For a chart showing the ups and downs of the Dow Jones Industrial Average since the year 2000, see stockcharts.com.
Books
Even More Information
Terms you’ve been hearing
housing bubble: a steep rise in the price of houses. The term implies that the bubble will burst, and prices will fall. The recent housing bubble resulted from low interest rates and the loosening of lending requirements, which brought many new buyers into the market. Since the number of homes for sale didn’t rise as quickly, prices went up… until demand finally fell, bringing down house prices with it.
predatory lending: the use of deceptive, unfair, abusive, or fraudulent practices when making a loan. For example, some lenders lead borrowers to believe that the interest rate of the loan is lower than it really is. Usually, predatory lending occurs when a loan is backed by collateral (e.g., a house or a car), which the lender can seize and resell if the borrower fails to pay back the loan. Countrywide, once the nation’s largest mortgage lender, paid billions in 2008 to settle a lawsuit alleging that the company misrepresented the terms of loans and persuaded customers to take out loans they couldn’t afford to repay.
subprime lending: a prime loan is one that is made to a customer with solid credit and with income adequate to repay the loan, so that the risk of default is small. A subprime loan is made to a customer whose credit and income are not as solid, and who poses a greater risk of default. Until 2004, fewer than 10% of all mortgage loans were made to subprime borrowers; from 2004-2006, that rate doubled.
default: failure to pay back a loan, such as a mortgage.
foreclosure: a legal proceeding by a lender to take possession of a home when the borrower fails to make payments on the loan.
commercial bank: a bank that accepts deposits from the public, makes loans, and provides related services.
investment bank: a financial institution that helps companies create and sell new stocks or bonds; also known as an underwriter. Investment banks do not accept deposits.
hedge fund: a special type of investment fund, limited to wealthy investors, using high-risk strategies in pursuit of high returns. Under the financial reform law passed in 2010, some hedge funds will be regulated for the first time.
shadow banking system: financial institutions that don’t accept deposits, and therefore have not been subject to close government regulation. Examples include pension funds, investment banks, hedge funds, and insurance companies. New York Times columnist and Nobel-Prize-winning economist Paul Krugman commented, “As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible—and they should have responded by extending regulations and the financial safety net to cover these new institutions.”
security: any form of ownership that can be easily traded, such as stocks or bonds; or, derivatives such as futures and options. Securities are issued by companies or governments, usually to raise money. See Wikipedia for more.
“exotic financial instruments”: innovative investment products, including mortgage-backed securities and collateralized debt obligations (see below). Prominent investor George Soros observed that “the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves… It was a shocking abdication of responsibility.”
derivative: a financial instrument whose value is linked to future price changes of a certain asset. For example, instead of buying 80 tons of coal as an investment, you could buy a derivative based on the price of the coal; if the price of coal goes up, then the value of your derivative will go up too. Farmers use derivatives to protect themselves against a fall in the price of their crops; investors use them to speculate, betting on a rise or fall in the prices of commodities. (For more on derivatives, see Wikipedia.)
mortgage-backed security: a security created by pooling mortgage loans and selling shares of the combined cash flows.
CDO (Collateralized Debt Obligation): a type of security backed by a group of assets (or “collateral”). CDOs are divided into different classes by degree of risk. The safest classes receive payments first, but earn less interest. Higher risk classes (such as subprime mortgages) pay higher interest rates, to make up for the greater risk of default.
credit default swap: a contract in which the buyer pays for a guarantee that, if a certain company defaults on a bond or loan, the buyer will receive a payoff. A CDS is a form of insurance—but, unlike other forms of insurance, it can be sold to an investor with no involvement in the underlying loan.
toxic mortgages: mortgages whose value has fallen substantially, or whose value is so uncertain that no one wants to buy them.
leverage: the use of borrowed money.
bailout: giving (or lending) money to a company or country in danger of failing, or defaulting on its loans.
stimulus package: a government program that seeks to stimulate economic growth and lift the economy out of a recession or slowdown. Methods include cutting taxes and/or interest rates (to stimulate consumer spending), and increasing government spending (to inject money into the economy, create jobs, and thereby increase demand for goods).
Fannie Mae: the Federal National Mortgage Association (FNMA), a government-sponsored agency, buys existing mortgages from the original lenders, repackages them, and sells them as mortgage-backed securities. Fannie Mae also guarantees mortgages, which helps lower interest rates. Because of its insolvency, the value of Fannie Mae’s stocks fell by 50% in July, 2008. The federal government placed it under conservatorship (new supervision, with new rules) to keep it from failing.
Freddie Mac: the Federal Home Loan Mortgage Corporation (FHLMC) was established by Congress in 1970 to expand opportunities for homeownership and affordable rental housing. The agency guarantees residential mortgages made by other lenders. In 2008, when both Fannie Mae and Freddie Mac faced a crisis because homeowners defaulted on so many mortgage loans, the federal government put both agencies under conservatorship to keep them from failing.
the Volcker Rule: limits the ability of banks to trade securities for their own profit. (In 2008, huge losses led to the credit crunch and the need for bank bailouts.) Paul Volcker, former chairman of the Federal Reserve, strongly urged that this be part of any financial reform legislation. The rule was incorporated in the final bill, though in a more limited form than Volcker recommended.
The biggest players, and how they fared Many of America’s largest financial institutions have failed, or been acquired by other companies. Few have emerged from the crisis in good health. (The CEOs listed here were in charge of their companies at the peak of the financial crisis.)
• Goldman Sachs (Lloyd C. Blankfein, CEO): managed to turn a profit during the subprime mortgage crisis, by foreseeing the disaster ahead and investing accordingly. In September, 2008, however, at the peak of the crisis, the firm announced it would become a bank holding company instead of an investment bank. The SEC sued Goldman Sachs in April, 2010, for allegedly misleading investors in one of its CDOs; in July, 2010, the firm paid $550 million to settle the case, without admitting any wrongdoing.
• Citigroup (Vikram Pandit, CEO): after suffering huge losses in 2008, the company received a total of $45 billion in bailout money from the federal government. Citigroup has repaid almost half of the bailout money; the rest was converted into a government ownership stake.
• American International Group/AIG (Edward M. Liddy, CEO through August, 2009): this insurance company, one of the biggest in the world, sold insurance on risky mortgage securities, but lost tens of billions of dollars when the number of defaults overwhelmed its ability to pay out. The Federal Reserve gave AIG $85 billion in emergency funds—the first of the government’s major bailouts. Taxpayers paid a total of $173 billion to save the company. AIG is still paying back its bailout funds.
• JPMorgan Chase (Jamie Dimon, CEO): Among the giant financial companies, JPMorgan Chase weathered the financial crisis best. The bank acquired the failed Washington Mutual and Bear Stearns, and was the only major company to post a profit during the crisis. It was also the first company to repay government bailout funds.
• Bear Stearns (James Cayne, CEO): The company issued huge amounts of mortgage-backed securities, and suffered heavy losses as a result. Despite an emergency loan from the Federal Reserve Bank of N.Y., the company couldn’t be saved, and was sold to JPMorgan Chase in 2008.
• Lehman Brothers (Richard Fuld, CEO): As Lehman faced bankruptcy, the government refused to help finance a takeover by another bank. In September, 2008, the company filed the largest bankruptcy in history, creating panic in the financial industry.
• Merrill Lynch (E. Stanley O’Neal, CEO until 2007; John Thain, CEO as of 2008): After losing $19.2 billion due to the mortgage crisis in the year ending September, 2008, the firm sold itself to Bank of America to escape bankruptcy.
• Washington Mutual/WaMu (Kerry Killinger, CEO): A wave of withdrawals by depositors led to the bank’s collapse in 2008. Federal regulators seized the bank and arranged its acquisition by JPMorgan Chase. This was the largest bank failure in American history.
• Wachovia (Ken Thompson, CEO until 6/08; Bob Steel, CEO after 7/08): Federal regulators determined that the bank was “systemically important” to the economy, and could not be allowed to fail. To avoid bankruptcy, the bank sold itself to Wells Fargo in 10/08.
• Bank of America (Kenneth Lewis, CEO): The bank seemed strong and bold when it acquired both Merrill Lynch and Countrywide during the mortgage crisis. But major losses followed; the bank received bailouts totaling $45 million, and longtime CEO Lewis lost his job. By 2010, however, the bank had paid back the government, and had began to turn a profit again. It had to pay a $150 million settlement, however, over accusations that it failed to disclose Merrill Lynch’s true condition to shareholders before the merger.
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Last updated 5/17/12
You may also be interested in the following News-Basics overviews: The Deficit and the Debt; Europe’s Debt Crisis; Globalization; The Debt Ceiling, the Budget and Deficit-Cutting.
