global financial crisis of 2008

global financial crisis of 2008
Name	2007–2008 financial crisis
Date	2007–2009
Location	Global
Cause	Subprime mortgage collapse; securitization; leverage; shadow banking

global financial crisis of 2008 was a worldwide banking and credit crisis centered on the collapse of housing-related securities and failures in interbank funding that led to pronounced contractions in United States credit markets, severe strains in the European financial sector, and international policy coordination. Major financial institutions such as Lehman Brothers, AIG, Bear Stearns, and Merrill Lynch experienced failures or rescues, prompting interventions by central banks including the Federal Reserve, the European Central Bank, and the Bank of England. The episode precipitated sharp declines in global trade and output and accelerated reform efforts exemplified by the Dodd–Frank Act and the creation of the Financial Stability Board.

Background and causes

Roots traced to housing markets in the United States and the proliferation of subprime mortgage lending, supported by securitization through mortgage-backed securitys and collateralized debt obligations sold to investment banks and commercial banks worldwide. Complex instruments such as credit default swaps were traded by entities including AIG and Lehman Brothers, while rating agencies like Moody's Investors Service, Standard & Poor's, and Fitch Ratings provided assessments that influenced demand from institutional investors such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America, and Deutsche Bank. Regulatory frameworks under agencies such as the Securities and Exchange Commission and national central banks interacted with global liquidity provided by the International Monetary Fund and the World Bank Group, while shadow banking participants—money market funds like Reserve Primary Fund and structured investment vehicles associated with BNP Paribas—added fragility. Policy choices linked to the Community Reinvestment Act debates, monetary policy under Alan Greenspan and Ben Bernanke, and global capital flows from surplus countries such as China and Japan amplified imbalances.

Timeline and major events

Key 2007–2009 episodes included the 2007 liquidity tensions after losses at Bear Stearns hedge funds, the March 2008 acquisition of Bear Stearns by JPMorgan Chase, the September 2008 failure and bankruptcy of Lehman Brothers, and the emergency support for AIG provided by the U.S. Treasury. Government-sponsored enterprises Fannie Mae and Freddie Mac entered conservatorship under the Federal Housing Finance Agency in September 2008. Other notable events encompassed the takeover of Merrill Lynch by Bank of America, the Icelandic banking collapse involving Landsbanki and Glitnir, and the freezing of interbank markets prompting coordinated cuts in policy rates by the European Central Bank, the Bank of England, and the Federal Reserve. Subsequent sovereign stress manifested in the Greek government-debt crisis, contagion in Ireland and Portugal, and market responses in indices such as the Dow Jones Industrial Average and the FTSE 100.

Key institutions and instruments involved

Prominent actors included global investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers), universal banks (Citigroup, Bank of America, Barclays), insurance companies (AIG, Zurich Insurance Group), and central banks (Federal Reserve, European Central Bank, Bank of England, Bank of Japan). Instruments central to the crisis were mortgage bonds including mortgage-backed securitys and collateralized debt obligations, as well as credit default swap contracts facilitated through dealers and platforms tied to institutions like IntercontinentalExchange and Chicago Mercantile Exchange. Market infrastructures such as repo markets, money market funds, and wholesale funding conduits were critical in transmitting runs and liquidity shortages to banks, hedge funds, and non-bank financial intermediaries including Lehman Brothers prime brokerage units and structured investment vehicles associated with Citigroup and HSBC.

Government and policy responses

Responses included emergency liquidity operations by the Federal Reserve (discount window and Term Auction Facility), capital injections (Troubled Asset Relief Program administered by the U.S. Treasury Department), guarantees and asset relief programs in the United Kingdom by the HM Treasury, and nationalizations such as the Royal Bank of Scotland intervention by UK authorities. International coordination occurred through the Group of Twenty and the International Monetary Fund which provided conditional financing to affected countries including Iceland and Hungary. Regulatory reforms followed, notably the Dodd–Frank Act in the United States and enhanced capital standards under the Basel III framework from the Bank for International Settlements aimed at addressing systemic risk identified by bodies including the Financial Stability Board.

Economic and social impacts

The shock produced deep recessions in the United States, United Kingdom, Germany, Japan, and other advanced economies, with rising unemployment, housing price declines, and household wealth losses affecting pension funds and institutional investors such as CalPERS and Norges Bank Investment Management. Emerging markets experienced capital flow reversals affecting Brazil, Russia, India, and China. Social consequences included increased mortgage foreclosures in regions like Florida, California, and Spain, political reactions involving elections in countries such as the United States and United Kingdom, and broader debates on inequality referenced by commentators citing works such as Thomas Piketty's later research and policy prescriptions from economists like Joseph Stiglitz and Paul Krugman.

Investigations, litigation, and regulatory reforms

Post-crisis inquiries included the Financial Crisis Inquiry Commission in the United States and national judicial or parliamentary probes in UK and Ireland. Litigation targeted firms including Goldman Sachs, Merrill Lynch, Credit Suisse, and Deutsche Bank over disclosures and securitization practices, while settlements involved the U.S. Department of Justice and state attorneys general. Regulatory responses produced legislation and rulemaking such as the Dodd–Frank Act, the establishment of the Consumer Financial Protection Bureau, enhanced supervision by the Federal Reserve, global standards from the Basel Committee on Banking Supervision, and resolution regimes inspired by the Orderly Liquidation Authority to address "too big to fail" entities like AIG and major banking groups.

Category:Financial crises