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Beginning of the end
On the brink
Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and Senate Banking Committee Chairman Chris Dodd (D-CT) join other leaders from the House and Senate for a meeting at the U.S. Capitol September 18, 2008 in Washington, DC. The financial leaders were on Captiol Hill to brief lawmakers on the latest efforts by the government to stem the recent Wall Street fear and the resulting financial crisis.
Search for a knight in shining armour continues
Collapse
Hank Paulson, US Secretary of the Treasury briefs on efforts to heal the nascent crisis on September 19, 2008.
Lehman employees on September 16, 2008.
1. Timeline
2. Main actors central to the dynamics of the crisis
3. Major lessons for political economy and global finance
4. Conclusions
End of an era on Wall Street
Lloyd Blankfein, CEO of Goldman Sachs, says the change will allow the bank access to funding
A Congressional report, concluded in the wake of the Senate's Permanent Subcommittee on Investigations' two-year foray into the causes of the financial crisis, found that Moody's and Standard and Poor's were responsible for triggering the crisis when they were forced to downgrade the inflated ratings they had slapped on complex MBSs. The panel found that the two agencies had continued to give top ratings to MBSs months after the housing market had started to collapse.
Fannie and Freddie's GSE status created certain perceptions in the marketplace, the first of which was that the federal government would step in and bail these organizations out if either firm ever ran into financial trouble. This was known as an "implicit guarantee".
The fact that the market believed in this implicit guarantee allowed Fannie Mae and Freddie Mac to borrow money in the bond market at lower rates (yields) than other financial institutions. The yields on Fannie Mae and Freddie Mac's corporate debt, known as agency debt, was historically about 35 basis points (.35%) higher than U.S. Treasury bonds, while 'AAA-rated' financial firms' debt was historically about 70 basis points (.7%) higher than U.S. Treasury bonds.
Fannie Mae and Freddie Mac were given a government-sponsored monopoly on a large part of the U.S. secondary mortgage market. It is this monopoly, combined with the government's implicit guarantee to keep these firms afloat, that would later contribute to the mortgage market's collapse.
Caveat Emptor- Those who accept the risks are no longer those who get stuck with the bills.
Kenneth D. Lewis, Chairman and CEO of Bank of America Corp.
Kenneth Lewis, the chairman and CEO of Bank of America Corp., engineered a series of takeovers during the financial crisis that created a banking behemoth involved in nearly every nook of the financial system. In early 2008, he took a gamble in buying leading mortgage lender Countrywide Financial, weighing what he called at the time the “short-term pain” of acquiring a deeply troubled company against the chance for instant scale in the business. He placed an even bigger bet in September 2008, buying Merrill Lynch and jumpstarting Bank of America’s efforts to enter investment banking.
In the years after the acquisitions, however, losses escalated and litigation proliferated. Analysts in 2012 estimated that Countrywide had cost Bank of America more than $40 billion, The Wall Street Journal reported.
Hank Paulson
Henry Paulson was barely into his second year as Treasury secretary when the financial crisis hit, prompting the former chief executive of Goldman Sachs Group Inc. to undertake a series of unprecedented government rescues—including helping to facilitate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. and placing mortgage giants Fannie Mae and Freddie Mac into conservatorship.
Ben Bernanke
Ben Bernanke, Chairman of the Federal Reserve during the crisis, and a student of the Great Depression, was eager to avoid a repeat on his watch and made broad use of the Fed's authorities to open financing spigots and protect Wall Street from collapse.
Timothy Geithner
Timothy Geithner was at the helm of the Federal Reserve Bank of New York during the crisis, serving as the U.S. government's eyes and ears on Wall Street. Mr. Geithner pushed to intervene in the crisis quickly, advocating for rescues of firms such as Bear Stearns Cos. and American International Group Inc.
Ralph Cioffi & Matthew Tanner, Hedge Fund Managers at Bear Sterns
The $1.6 billion, mid-2007 collapse of the highly leveraged Bear Stearns hedge funds managed by Ralph Cioffi and Matthew Tannin’s was one of the first distress signs in the credit markets. Federal prosecutors then moved to file criminal charges against the men, alleging they had misled investors about the portfolio of mortgage-backed securities.
Jamie Dimon, Chairman and CEO of JP Morgan Chase & Co.
Jamie Dimon emerged as one of the banking industry's most powerful executives during the financial crisis. J.P. Morgan swept in to acquire Bear Stearns Cos. in March 2008 as the brokerage firm was collapsing, getting a $29 billion backstop from the government. J.P. Morgan then bought Washington Mutual Inc.’s banking operations in September 2008 from the government.
Joseph Cassano, Head of AIG's Financial Products Division
As head of AIG’s Financial Products division, Joseph Cassano was the center of a bet made on mortgages that helped force the insurance giant into the arms of the U.S. government. The unit sold billions in credit-default swaps on mortgage-backed bond pools, essentially insurance against the bonds collapsing, and then faced billions in collateral calls when the market turned.
Richard Fuld Jr., CEO of Lehman Brothers Holding, Inc.
Richard Fuld was chairman and CEO of Lehman Brothers Holdings Inc., a bond-focused investment bank that moved aggressively into the commercial real-estate market and leveraged loans in the years just before the crisis. As losses mounted in 2008, Mr. Fuld sought to reassure creditors and trading partners and raise capital. But efforts to sell the firm foundered on Sept. 14, 2008, when the government refused to provide a financial backstop. On Sept. 15, Lehman filed for bankruptcy protection, and its assets were subsequently sold off.
Robert Willumstad, Chairman and CEO of American International Group Inc.
Mr. Willumstad scrambled the weekend of Sept. 13-14, 2008, to raise cash ahead of an anticipated costly downgrade of AIG’s credit rating, even appealing to the Federal Reserve in vain for temporary funding. On Sept. 16, the U.S. government seized control of AIG, signaling its concerns about the danger a collapse could pose to the financial system. As part of the deal, Treasury Secretary Henry Paulson insisted that Mr. Willumstad step aside.
Angelo Mozilo, co-founder and CEO of Countrywide Financial Corp.
Angelo Mozilo was the co-founder and CEO of Countrywide Financial Corp., one of the country’s largest lenders and a purveyor of high-risk loans leading up to the financial crisis. Mr. Mozilo was a pioneer of the subprime and adjustable-rate mortgages that helped fuel the housing boom in the years before 2008. Mr. Mozilo has defended Countrywide’s lending practices, saying turmoil in the credit markets and falling home prices caused most of the lender’s loan losses.
John Thain, Chairman and CEO of Merrill Lynch & Co.
John Thain was chairman and CEO of Merrill Lynch & Co., taking the job in October 2007 as the financial crisis was brewing. He sought to insulate the company from mounting market problems: raising capital, purging toxic assets and selling big equity stakes. But Merrill held the same kinds of mortgage-backed assets as Lehman and was hammered in early September 2008 by investors worried it would need capital. After 48 hours of frenetic negotiating, and with federal officials pushing for a deal, Bank of America Corp. agreed Sept. 14 to buy Merrill Lynch for $50 billion in stock, about 40% less than Merrill’s peak stock-market value.
Who is to blame?
Kerry Killinger, Chairman and CEO of Washington Mutual Inc.
Kerry Killinger was the chairman and CEO of Seattle-based Washington Mutual Inc., growing it from a small, regional lender in the early 1990s into the largest savings and loan bank nationwide. During the housing boom, Mr. Killinger led the bank on a path of explosive mortgage growth in part by expanding heavily into subprime and option adjustable-rate mortgages.
Mr. Killinger was ousted from his position as CEO in September 2008, just before WaMu suffered a run that forced the government to seize the bank. Its closure marked the largest bank failure in U.S. history. The banking operations were sold to J.P. Morgan Chase & Co. for $1.88 billion.
From 'The Street, The Bull and The Crisis': unethical behaviour
continues to persist.
(May, 2015)
Neil Barofsky, the departing special inspector general for TARP, warned that the same "too big to fail" firms that nearly brought down the financial system in 2008 have now become bigger.