2007–2008 financial crisis

2007–2008 financial crisis
David Shankbone · CC BY-SA 3.0 · source
Name	2007–2008 financial crisis
Date	2007–2008
Location	Global
Outcome	Major interventions by Federal Reserve (United States), Treasury (United States Department of the Treasury), and international authorities

2007–2008 financial crisis

The 2007–2008 financial crisis was a global systemic shock centered on failures in United States mortgage markets, complex Lehman Brothers-era securities, and interbank funding strains that precipitated interventions by the Federal Reserve (United States), Bank of England, and other authorities. Major participants included institutions such as Bear Stearns, AIG, Lehman Brothers, Goldman Sachs, and Morgan Stanley, while policy responses involved statutes and programs tied to the United States Congress, European Central Bank, and International Monetary Fund. The crisis reshaped Basel Committee on Banking Supervision standards, prompted inquiries like those by the Financial Crisis Inquiry Commission, and influenced political outcomes in nations including the United States presidential election, 2008 and parliamentary debates in the United Kingdom general election, 2010.

Background and causes

Roots trace to the expansion of subprime mortgage lending, securitization by firms such as Fannie Mae and Freddie Mac, and the growth of mortgage-backed security and collateralized debt obligation markets managed by Credit default swap counterparties like AIG Financial Products. Financial innovation by JPMorgan Chase, Bank of America, Citigroup, and Deutsche Bank interacted with risk models used at Goldman Sachs and Lehman Brothers; rating agencies including Moody's Investors Service, Standard & Poor's, and Fitch Ratings assigned tranches ratings that influenced demand from investors like Pension Benefit Guaranty Corporation-linked funds and BlackRock. Deregulation trends associated with policy decisions related to the Community Reinvestment Act and rulings such as Gramm–Leach–Bliley Act changes affected institutions including Bear Stearns and regional firms like IndyMac. Global imbalances involving the People's Republic of China and commodity exporters led sovereign wealth funds and banks in Iceland and Spain to take on structured products, exacerbating vulnerabilities alongside leverage held by hedge funds including those managed by Bridgewater Associates.

Timeline of key events

Early signs appeared with rising delinquencies in 2006 United States mortgage crisis portfolios and liquidity strains in 2007 that impacted Northern Rock and led to the Northern Rock crisis. In March 2008 the acquisition of Bear Stearns by JP Morgan Chase followed runs on prime money market funds and asset write-downs at UBS and Credit Suisse. In September 2008 the bankruptcy of Lehman Brothers and the bailout of American International Group prompted passage of the Emergency Economic Stabilization Act of 2008 and creation of the Troubled Asset Relief Program. Equity markets collapsed with interventions by the Federal Deposit Insurance Corporation and extraordinary measures by the Federal Reserve (United States) including Primary Dealer Credit Facility operations and facility extensions to Maiden Lane. Sovereign responses included guarantees of deposits in Ireland and recapitalizations of banks in Spain and Germany.

Major institutions and market impacts

Commercial and investment banks such as Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley faced write-downs of asset-backed securities originated by Countrywide Financial Corporation and packaged by firms using structures like synthetic CDOs. Insurance entities such as AIG required government credit lines to cover exposures from counterparties including Pension funds and other insurers. Money market funds such as Reserve Primary Fund experienced runs that led to the U.S. Treasury temporary guarantee program. Central counterparties and repo markets saw stresses analogous to those that afflicted Long-Term Capital Management in 1998, while stock exchanges including New York Stock Exchange and NASDAQ recorded dramatic volatility tied to credit default swap litigation and short-selling restrictions imposed by regulators such as the Securities and Exchange Commission.

Government and central bank responses

Authorities including the Federal Reserve (United States), European Central Bank, Bank of Japan, and People's Bank of China deployed liquidity facilities, rate cuts, and asset purchase programs inspired by earlier interventions such as those during the Asian financial crisis and 1997 East Asian financial crisis. Fiscal measures included stimulus packages enacted by the United States Congress and guarantee schemes in the United Kingdom and Germany coordinated with central bank swap lines negotiated among the Federal Reserve (United States), Bank of England, European Central Bank, and Bank of Canada. Legislative responses encompassed the Emergency Economic Stabilization Act of 2008 and later the Dodd–Frank Wall Street Reform and Consumer Protection Act, affecting agencies such as the Federal Deposit Insurance Corporation and the newly created Consumer Financial Protection Bureau.

Global transmission and international effects

Contagion spread through interbank linkages among institutions in Iceland, Ireland, Spain, and Greece, leading to sovereign stress that contributed to the European sovereign debt crisis and programs by the International Monetary Fund and the European Stability Mechanism. Emerging markets in Brazil, Russia, India, and South Africa experienced capital outflows, while commodity-dependent economies such as Nigeria and Venezuela faced export shocks. Cross-border exposures among banks including BNP Paribas, HSBC, and Societe Generale transmitted losses, and international bodies like the Financial Stability Board coordinated standards with the Basel Committee on Banking Supervision and multilateral lenders including the World Bank.

Economic and social consequences

The shock produced a deep contraction in United States gross domestic product and recessions in United Kingdom, Eurozone, and other jurisdictions, leading to elevated unemployment in regions such as Catalonia and Rust Belt communities. Housing markets in United States metropolitan areas including Las Vegas, Nevada, Miami, Florida, and Phoenix, Arizona suffered price collapses, while foreclosure waves affected homeowners associated with lenders like Countrywide Financial Corporation and servicing firms such as Ocwen Financial Corporation. Political repercussions shaped campaigns for figures including Barack Obama and policy debates in parliaments such as House of Commons of the United Kingdom, fueling movements like Occupy Wall Street. Fiscal deficits and austerity measures influenced elections in Greece and the United Kingdom general election, 2010.

Regulatory reforms and legacy

Reform efforts culminated in statutes and frameworks like the Dodd–Frank Wall Street Reform and Consumer Protection Act, enhanced capital standards under Basel III, expanded roles for the Financial Stability Board, and resolution mechanisms including the Orderly Liquidation Authority. Institutions such as Federal Deposit Insurance Corporation rules changed, and supervisory regimes at Office of the Comptroller of the Currency and Prudential Regulation Authority were revised. The crisis reshaped risk management at firms including Goldman Sachs and UBS, influenced academic research from economists associated with Harvard University and Massachusetts Institute of Technology, and remains a reference point in policy debates involving Monetary policy and financial stability institutions.

Category:Financial crises