The financial crisis of — , also known as the global financial crisis and the financial crisis , is considered by many economists to have been the worst financial crisis since the Great Depression of the s. It began in with a crisis in the subprime mortgage market in the US, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, The crisis was nonetheless followed by a global economic downturn , the Great Recession.

The European debt crisis , a crisis in the banking system of the European countries using the euro , followed later. The Dodd—Frank Act [7] was enacted in the US in the aftermath of the crisis to "promote the financial stability of the United States".

The precipitating factor was a high default rate in the United States subprime home mortgage sector. The expansion of this sector was encouraged by the Community Reinvestment Act CRA , [10] [11] [12] [13] a US federal law designed to help low- and moderate-income Americans get mortgage loans. Many of these loans were also bundled together and formed into new financial instruments called mortgage-backed securities , which could be sold as ostensibly low-risk securities partly because they were often backed by credit default swaps insurance.

The accumulation and subsequent high default rate of these mortgages led to the financial crisis and the consequent damage to the world economy. High mortgage approval rates led to a large pool of homebuyers, which drove up housing prices. This appreciation in value led large numbers of homeowners subprime or not to borrow against their homes as an apparent windfall. This "bubble" would be burst by a rising Single-Family Residential Mortgages Delinquency Rate beginning in August and peaking in the first quarter, As the value of these assets plummeted, the market buyers for these securities evaporated and banks who were heavily invested in these assets began to experience a liquidity crisis.

Lehman Brothers filed for bankruptcy on September 15, In spite of trillions [18] paid out by the US federal government, it became much more difficult to borrow money. The resulting decrease in buyers caused housing prices to plummet. While the collapse of large financial institutions was prevented by the bailout of banks by national governments, stock markets still dropped worldwide.

In many areas, the housing market also suffered, resulting in evictions , foreclosures , and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the Great Recession of — and contributing to the European sovereign-debt crisis.

The bursting of the US housing bubble , which peaked at the end of , [22] [23] caused the values of securities tied to US real estate pricing to plummet, damaging financial institutions globally.

Economies worldwide slowed during this period, as credit tightened and international trade declined. Many causes for the financial crisis have been suggested, with varying weight assigned by experts. Easy availability of credit in the US, fueled by large inflows of foreign funds after the Russian debt crisis and Asian financial crisis of the — period, led to a housing construction boom and facilitated debt-financed consumer spending.

As banks began to give out more loans to potential home owners, housing prices began to rise. Lax lending standards and rising real estate prices also contributed to the real estate bubble. Loans of various types e. As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities MBS and collateralized debt obligations CDO , which derived their value from mortgage payments and housing prices, greatly increased.

As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of US dollars globally.

While the housing and credit bubbles were building, a series of factors caused the financial system to both expand and become increasingly fragile, a process called financialization. US Government policy from the s onward has emphasized deregulation to encourage business, which resulted in less oversight of activities and less disclosure of information about new activities undertaken by banks and other evolving financial institutions.

Thus, policymakers did not immediately recognize the increasingly important role played by financial institutions such as investment banks and hedge funds , also known as the shadow banking system.

Some experts believe these institutions had become as important as commercial depository banks in providing credit to the US economy, but they were not subject to the same regulations. These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.

Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments.

The US Financial Crisis Inquiry Commission reported its findings in January The s were the decade of subprime borrowers; no longer was this a segment left to fringe lenders. The relaxing of credit lending standards by investment banks and commercial banks drove this about-face. Subprime did not become magically less risky; Wall Street just accepted this higher risk.

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However, as market power shifted from securitizers to originators and as intense competition from private securitizers undermined GSE power, mortgage standards declined and risky loans proliferated.

As well as easy credit conditions, there is evidence that competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major US investment banks and GSEs such as Fannie Mae played an important role in the expansion of lending, with GSEs eventually relaxing their standards to try to catch up with the private banks. A contrarian view is that Fannie Mae and Freddie Mac led the way to relaxed underwriting standards, starting in , by advocating the use of easy-to-qualify automated underwriting and appraisal systems, by designing the no-downpayment products issued by lenders, by the promotion of thousands of small mortgage brokers, and by their close relationship to subprime loan aggregators such as Countrywide.

The majority report of the Financial Crisis Inquiry Commission, written by the six Democratic appointees, the minority report, written by three of the four Republican appointees, studies by Federal Reserve economists, and the work of several independent scholars generally contend that government affordable housing policy was not the primary cause of the financial crisis. In his dissent to the majority report of the Financial Crisis Inquiry Commission, American Enterprise Institute fellow Peter J.

Wallison [57] stated his belief that the roots of the financial crisis can be traced directly and primarily to affordable housing policies initiated by the US Department of Housing and Urban Development HUD in the s and to massive risky loan purchases by government-sponsored entities Fannie Mae and Freddie Mac.

In the early and mids, the Bush administration called numerous times [59] for investigation into the safety and soundness of the GSEs and their swelling portfolio of subprime mortgages. On September 10, , the House Financial Services Committee held a hearing at the urging of the administration to assess safety and soundness issues and to review a recent report by the Office of Federal Housing Enterprise Oversight OFHEO that had uncovered accounting discrepancies within the two entities.

The majority of these were prime loans. To other analysts the delay between CRA rule changes in and the explosion of subprime lending is not surprising, and does not exonerate the CRA.

They contend that there were two, connected causes to the crisis: Both causes had to be in place before the crisis could take place. Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude.

In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren't enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for the end product.

Economist Paul Krugman argued in January that the simultaneous growth of the residential and commercial real estate pricing bubbles and the global nature of the crisis undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA, or predatory lending were primary causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes. Countering Krugman, Peter J.

Krugman's contention that the growth of a commercial real estate bubble indicates that US housing policy was not the cause of the crisis is challenged by additional analysis.

After researching the default of commercial loans during the financial crisis, Xudong An and Anthony B. Sanders reported in December Business journalist Kimberly Amadeo reports: Three years later, commercial real estate started feeling the effects. Gierach, a real estate attorney and CPA, wrote:.

In other words, the borrowers did not cause the loans to go bad, it was the economy. This ratio rose to 4. This pool of money had roughly doubled in size from to , yet the supply of relatively safe, income generating investments had not grown as fast.

Investment banks on Wall Street answered this demand with products such as the mortgage-backed security and the collateralized debt obligation that were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the US, with enormous fees accruing to those throughout the mortgage supply chain , from the mortgage broker selling the loans to small banks that funded the brokers and the large investment banks behind them.

By approximately , the supply of mortgages originated at traditional lending standards had been exhausted, and continued strong demand began to drive down lending standards. The collateralized debt obligation in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. This essentially places cash payments from multiple mortgages or other debt obligations into a single pool from which specific securities draw in a specific sequence of priority.

Those securities first in line received investment-grade ratings from rating agencies. Securities with lower priority had lower credit ratings but theoretically a higher rate of return on the amount invested. During , lenders began foreclosure proceedings on nearly 1. Lower interest rates encouraged borrowing. From to , the Federal Reserve lowered the federal funds rate target from 6.

Additional downward pressure on interest rates was created by the high and rising US current account deficit, which peaked along with the housing bubble in Federal Reserve chairman Ben Bernanke explained how trade deficits required the US to borrow money from abroad, in the process bidding up bond prices and lowering interest rates.

Financing these deficits required the country to borrow large sums from abroad, much of it from countries running trade surpluses. These were mainly the emerging economies in Asia and oil-exporting nations.

The balance of payments identity requires that a country such as the US running a current account deficit also have a capital account investment surplus of the same amount. Hence large and growing amounts of foreign funds capital flowed into the US to finance its imports. All of this created demand for various types of financial assets, raising the prices of those assets while lowering interest rates.

Ben Bernanke has referred to this as a " saving glut ". A flood of funds capital or liquidity reached the US financial markets. Foreign governments supplied funds by purchasing Treasury bonds and thus avoided much of the direct effect of the crisis. US households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets.

Financial institutions invested foreign funds in mortgage-backed securities. The Fed then raised the Fed funds rate significantly between July and July Subprime lending standards declined in the USA: By , many lenders dropped the required FICO score to , making it much easier to qualify for prime loans and making subprime lending a riskier business.

Proof of income and assets were de-emphasized. Loans moved from full documentation to low documentation to no documentation. One subprime mortgage product that gained wide acceptance was the no income, no job, no asset verification required NINJA mortgage. Informally, these loans were aptly referred to as "liar loans" because they encouraged borrowers to be less than honest in the loan application process.

Bowen III on events during his tenure as the Business Chief Underwriter for Correspondent Lending in the Consumer Lending Group for Citigroup where he was responsible for over professional underwriters suggests that by the final years of the US housing bubble — , the collapse of mortgage underwriting standards was endemic.

Moreover, during , "defective mortgages from mortgage originators contractually bound to perform underwriting to Citi's standards increased There is strong evidence that the GSEs—due to their large size and market power—were far more effective at policing underwriting by originators and forcing underwriters to repurchase defective loans.

By contrast, private securitizers have been far less aggressive and less effective in recovering losses from originators on behalf of investors. Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers to enter into "unsafe" or "unsound" secured loans for inappropriate purposes.

A classic bait-and-switch method was used by Countrywide Financial , advertising low interest rates for home refinancing. Such loans were covered by very detailed contracts, and swapped for more expensive loan products on the day of closing. Countrywide, sued by California Attorney General Jerry Brown for "unfair business practices" and "false advertising", was making high cost mortgages "to homeowners with weak credit, adjustable rate mortgages ARMs that allowed homeowners to make interest-only payments".

This caused Countrywide's financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender.

Former employees from Ameriquest , which was United States' leading wholesale lender, [] described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits.

A OECD study [] suggest that bank regulation based on the Basel accords encourage unconventional business practices and contributed to or even reinforced the financial crisis. In other cases, laws were changed or enforcement weakened in parts of the financial system. Prior to the crisis, financial institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses.

Much of this leverage was achieved using complex financial instruments such as off-balance sheet securitization and derivatives, which made it difficult for creditors and regulators to monitor and try to reduce financial institution risk levels. US households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. From to , the top five US investment banks each significantly increased their financial leverage see diagram , which increased their vulnerability to a financial shock.

Changes in capital requirements, intended to keep US banks competitive with their European counterparts, allowed lower risk weightings for AAA securities. The shift from first-loss tranches to AAA tranches was seen by regulators as a risk reduction that compensated the higher leverage. Lehman Brothers went bankrupt and was liquidated , Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation.

With the exception of Lehman, these companies required or received government support. However, both Barclays and Bank of America ultimately declined to purchase the entire company. Behavior that may be optimal for an individual e. Too many consumers attempting to save or pay down debt simultaneously is called the paradox of thrift and can cause or deepen a recession.

Economist Hyman Minsky also described a "paradox of deleveraging" as financial institutions that have too much leverage debt relative to equity cannot all de-leverage simultaneously without significant declines in the value of their assets. During April , US Federal Reserve vice-chair Janet Yellen discussed these paradoxes:. Once this massive credit crunch hit, it didn't take long before we were in a recession.

The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. A process of balance sheet deleveraging has spread to nearly every corner of the economy.

Consumers are pulling back on purchases, especially on durable goods, to build their savings. Businesses are cancelling planned investments and laying off workers to preserve cash.

And, financial institutions are shrinking assets to bolster capital and improve their chances of weathering the current storm. Once again, Minsky understood this dynamic. He spoke of the paradox of deleveraging, in which precautions that may be smart for individuals and firms—and indeed essential to return the economy to a normal state—nevertheless magnify the distress of the economy as a whole.

The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure such as the default of a borrower or to assist with obtaining financing. Examples pertinent to this crisis included: The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions.

For example, buying a CDS to insure a CDO ended up giving the seller the same risk as if they owned the CDO, when those CDO's became worthless. This boom in innovative financial products went hand in hand with more complexity.

It multiplied the number of actors connected to a single mortgage including mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, and finally investors, insurances and providers of repo funding.

With increasing distance from the underlying asset these actors relied more and more on indirect information including FICO scores on creditworthiness, appraisals and due diligence checks by third party organizations, and most importantly the computer models of rating agencies and risk management desks.

Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse. Martin Wolf further wrote in June that certain financial innovations enabled firms to circumvent regulations, such as off-balance sheet financing that affects the leverage or capital cushion reported by major banks, stating: The pricing of risk refers to the incremental compensation required by investors for taking on additional risk, which may be measured by interest rates or fees.

Several scholars have argued that a lack of transparency about banks' risk exposures prevented markets from correctly pricing risk before the crisis, enabled the mortgage market to grow larger than it otherwise would have, and made the financial crisis far more disruptive than it would have been if risk levels had been disclosed in a straightforward, readily understandable format. For a variety of reasons, market participants did not accurately measure the risk inherent with financial innovation such as MBS and CDOs or understand its effect on the overall stability of the financial system.

Another example relates to AIG , which insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted.

However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September The Financial Crisis Inquiry Commission FCIC made the major government study of the crisis. It concluded in January The Commission concludes AIG failed and was rescued by the government primarily because its enormous sales of credit default swaps were made without putting up the initial collateral, setting aside capital reserves, or hedging its exposure — a profound failure in corporate governance, particularly its risk management practices.

AIG's failure was possible because of the sweeping deregulation of over-the-counter OTC derivatives, including credit default swaps, which effectively eliminated federal and state regulation of these products, including capital and margin requirements that would have lessened the likelihood of AIG's failure. The limitations of a widely used financial model also were not properly understood.

Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies. Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected.

The cracks became full-fledged canyons in —when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

As financial assets became more complex and harder to value, investors were reassured by the fact that the international bond rating agencies and bank regulators accepted as valid some complex mathematical models that showed the risks were much smaller than they actually were. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility. Moreover, a conflict of interest between professional investment managers and their institutional clients , combined with a global glut in investment capital, led to bad investments by asset managers in over-priced credit assets.

Professional investment managers generally are compensated based on the volume of client assets under management. There is, therefore, an incentive for asset managers to expand their assets under management in order to maximize their compensation. As the glut in global investment capital caused the yields on credit assets to decline, asset managers were faced with the choice of either investing in assets where returns did not reflect true credit risk or returning funds to clients.

Many asset managers continued to invest client funds in over-priced under-yielding investments, to the detriment of their clients, so they could maintain their assets under management. They supported this choice with a "plausible deniability" of the risks associated with subprime-based credit assets because the loss experience with early "vintages" of subprime loans was so low.

Despite the dominance of the above formula, there are documented attempts of the financial industry, occurring before the crisis, to address the formula limitations, specifically the lack of dependence dynamics and the poor representation of extreme events. Life After Copulas", published in by World Scientific, summarizes a conference held by Merrill Lynch in London where several practitioners attempted to propose models rectifying some of the copula limitations.

See also the article by Donnelly and Embrechts [] and the book by Brigo, Pallavicini and Torresetti, that reports relevant warnings and research on CDOs appeared in Mortgage risks were underestimated by every institution in the chain from originator to investor by underweighting the possibility of falling housing prices based on historical trends of the past 50 years.

Limitations of default and prepayment models, the heart of pricing models, led to overvaluation of mortgage and asset-backed products and their derivatives by originators, securitizers, broker-dealers, rating-agencies, insurance underwriters and investors. There is strong evidence that the riskiest, worst performing mortgages were funded through the "shadow banking system" and that competition from the shadow banking system may have pressured more traditional institutions to lower their own underwriting standards and originate riskier loans.

In a June speech, President and CEO of the New York Federal Reserve Bank Timothy Geithner —who in became Secretary of the United States Treasury—placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because of maturity mismatch , meaning that they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets.

This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities:. The combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles. Paul Krugman , laureate of the Nobel Prize in Economics , described the run on the shadow banking system as the "core of what happened" to cause the crisis.

He referred to this lack of controls as "malign neglect" and argued that regulation should have been imposed on all banking-like activity. The securitization markets supported by the shadow banking system started to close down in the spring of and nearly shut-down in the fall of More than a third of the private credit markets thus became unavailable as a source of funds. Rapid increases in a number of commodity prices followed the collapse in the housing bubble.

An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states. Copper prices increased at the same time as oil prices. Prices were only just starting to recover as of January , but most of Australia's nickel mines had gone bankrupt by then.

Another analysis, different from the mainstream explanation, is that the financial crisis is merely a symptom of another, deeper crisis, which is a systemic crisis of capitalism itself. Ravi Batra 's theory is that growing inequality of financial capitalism produces speculative bubbles that burst and result in depression and major political changes. He has also suggested that a "demand gap" related to differing wage and productivity growth explains deficit and debt dynamics important to stock market developments.

John Bellamy Foster , a political economy analyst and editor of the Monthly Review , believes that the decrease in GDP growth rates since the early s is due to increasing market saturation. In , John C. Bogle wrote that a series of challenges face capitalism that have contributed to past financial crises and have not been sufficiently addressed:.

Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long They failed to 'keep an eye on these geniuses' to whom they had entrusted the responsibility of the management of America's great corporations. Echoing the central thesis of James Burnham's seminal book, The Managerial Revolution , Bogle cites particular issues, including: An analysis conducted by Mark Roeder , a former executive at the Swiss-based UBS Bank, suggested that large-scale momentum, or The Big Mo "played a pivotal role" in the —09 global financial crisis.

Roeder suggested that "recent technological advances, such as computer-driven trading programs, together with the increasingly interconnected nature of markets, has magnified the momentum effect. This has made the financial sector inherently unstable. He says this stagnation forced the population to borrow to meet the cost of living.

The former Governor of the Reserve Bank of India Raghuram Rajan had predicted the crisis in when he became chief economist at the International Monetary Fund. In , at a celebration honouring Alan Greenspan , who was about to retire as chairman of the US Federal Reserve , Rajan delivered a controversial paper that was critical of the financial sector. These risks are known as tail risks. But perhaps the most important concern is whether banks will be able to provide liquidity to financial markets so that if the tail risk does materialise, financial positions can be unwound and losses allocated so that the consequences to the real economy are minimised.

The financial crisis was not widely predicted by mainstream economists except Raghuram Rajan , who instead spoke of the Great Moderation. A number of heterodox economists predicted the crisis, with varying arguments. Dirk Bezemer in his research [] credits with supporting argument and estimates of timing 12 economists with predicting the crisis: Examples of other experts who gave indications of a financial crisis have also been given.

A cover story in BusinessWeek magazine claims that economists mostly failed to predict the worst international economic crisis since the Great Depression of the s. For example, an article in the New York Times informs that economist Nouriel Roubini warned of such crisis as early as September , and the article goes on to state that the profession of economics is bad at predicting recessions.

Shiller, an expert in housing markets , wrote an article a year before the collapse of Lehman Brothers in which he predicted that a slowing US housing market would cause the housing bubble to burst, leading to financial collapse. Within mainstream financial economics , most believe that financial crises are simply unpredictable, [] following Eugene Fama's efficient-market hypothesis and the related random-walk hypothesis , which state respectively that markets contain all information about possible future movements, and that the movements of financial prices are random and unpredictable.

Recent research casts doubt on the accuracy of "early warning" systems of potential crises, which must also predict their timing. Stock trader and financial risk engineer Nassim Nicholas Taleb , author of the book The Black Swan , spent years warning against the breakdown of the banking system in particular and the economy in general owing to their use of bad risk models and reliance on forecasting, and their reliance on bad models, and framed the problem as part of "robustness and fragility".

The US stock market peaked in October , when the Dow Jones Industrial Average index exceeded 14, points. It then entered a pronounced decline, which accelerated markedly in October By March , the Dow Jones average had reached a trough of around 6, Four years later, it hit an all-time high. It is probable, but debated, that the Federal Reserve's aggressive policy of quantitative easing spurred the partial recovery in the stock market.

Market strategist Phil Dow believes distinctions exist "between the current market malaise" and the Great Depression. The past two years ranked third, however. The first notable event signaling a possible financial crisis occurred in the United Kingdom on August 9, , when BNP Paribas , citing "a complete evaporation of liquidity", blocked withdrawals from three hedge funds. The significance of this event was not immediately recognized but soon led to a panic as investors and savers attempted to liquidate assets deposited in highly leveraged financial institutions.

One of the first victims was Northern Rock , a medium-sized British bank. This in turn led to investor panic and a bank run [] in mid-September Calls by Liberal Democrat Treasury Spokesman Vince Cable to nationalise the institution were initially ignored; in February , however, the British government having failed to find a private sector buyer relented, and the bank was taken into public hands.

Northern Rock's problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions. The first visible institution to run into trouble in the United States was the Southern California—based IndyMac , a spin-off of Countrywide Financial.

Before its failure, IndyMac Bank was the largest savings and loan association in the Los Angeles market and the seventh largest mortgage originator in the United States. IndyMac Bank was founded as Countrywide Mortgage Investment in by David S. Loeb and Angelo Mozilo [] [] as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae. In , Countrywide spun off IndyMac as an independent company run by Mike Perry, who remained its CEO until the downfall of the bank in July The primary causes of its failure were largely associated with its business strategy of originating and securitizing Alt-A loans on a large scale.

This strategy resulted in rapid growth and a high concentration of risky assets. From its inception as a savings association in , IndyMac grew to the seventh largest savings and loan and ninth largest originator of mortgage loans in the United States.

Appraisals obtained by IndyMac on underlying collateral were often questionable as well. Ultimately, loans were made to many borrowers who simply could not afford to make their payments.

The thrift remained profitable only as long as it was able to sell those loans in the secondary mortgage market. IndyMac resisted efforts to regulate its involvement in those loans or tighten their issuing criteria: May 12, , in a small note in the "Capital" section of its what would become its last Q released before receivership, IndyMac revealed — but did not admit — that it was no longer a well-capitalized institution and that it was headed for insolvency.

IndyMac concluded that these downgrades would have harmed the Company's risk-based capital ratio as of June 30, Had these lowered ratings been in effect at March 31, , IndyMac concluded that the bank's capital ratio would have been 9. Senator Charles Schumer D-NY later pointed out that brokered deposits made up more than 37 percent of IndyMac's total deposits, and ask the Federal Deposit Insurance Corporation FDIC whether it had considered ordering IndyMac to reduce its reliance on these deposits.

IndyMac was taking new measures to preserve capital, such as deferring interest payments on some preferred securities. Dividends on common shares had already been suspended for the first quarter of , after being cut in half the previous quarter. The company still had not secured a significant capital infusion nor found a ready buyer. On June 26, , Senator Charles Schumer D-NY , a member of the Senate Banking Committee , chairman of Congress' Joint Economic Committee and the third-ranking Democrat in the Senate, [] released several letters he had sent to regulators, which warned that, "The possible collapse of big mortgage lender IndyMac Bancorp Inc.

IndyMac announced the closure of both its retail lending and wholesale divisions, halted new loan submissions, and cut 3, jobs. On July 11, , citing liquidity concerns, the FDIC put IndyMac Bank into conservatorship. A bridge bank , IndyMac Federal Bank, FSB, was established to assume control of IndyMac Bank's assets, its secured liabilities, and its insured deposit accounts.

The FDIC announced plans to open IndyMac Federal Bank, FSB on July 14, Until then, depositors would have access their insured deposits through ATMs, their existing checks, and their existing debit cards. Telephone and Internet account access was restored when the bank reopened. IndyMac Bancorp filed for Chapter 7 bankruptcy on July 31, Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial , as they could no longer obtain financing through the credit markets.

Over mortgage lenders went bankrupt during and Concerns that investment bank Bear Stearns would collapse in March resulted in its fire-sale to JP Morgan Chase. The financial institution crisis hit its peak in September and October Several major institutions either failed, were acquired under duress, or were subject to government takeover.

These included Lehman Brothers , Merrill Lynch , Fannie Mae, Freddie Mac, Washington Mutual , Wachovia , Citigroup , and AIG. Waxman, the California Democrat who chaired the House Committee on Oversight and Government Reform. Fuld said he was a victim of the collapse, blaming a "crisis of confidence" in the markets for dooming his firm. In September , the crisis hit its most critical stage. There was the equivalent of a bank run on the money market funds , which frequently invest in commercial paper issued by corporations to fund their operations and payrolls.

This interrupted the ability of corporations to rollover replace their short-term debt. The US government responded by extending insurance for money market accounts analogous to bank deposit insurance via a temporary guarantee [] and with Federal Reserve programs to purchase commercial paper.

The TED spread , an indicator of perceived credit risk in the general economy, spiked up in July , remained volatile for a year, then spiked even higher in September , [] reaching a record 4.

Bernanke reportedly told them: Economist Paul Krugman and US Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the shadow banking system , which had grown to nearly equal the importance of the traditional commercial banking sector as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper , investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations.

Financial crisis of – - Wikipedia

This meant that nearly one-third of the US lending mechanism was frozen and continued to be frozen into June The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions". While traditional banks have raised their lending standards, it was the collapse of the shadow banking system that is the primary cause of the reduction in funds available for borrowing. There is a direct relationship between declines in wealth and declines in consumption and business investment, which along with government spending, represent the economic engine.

Between June and November , Americans lost an estimated average of more than a quarter of their collective net worth. Further, US homeowners had extracted significant equity in their homes in the years leading up to the crisis, which they could no longer do once housing prices collapsed.

In some cases the Fed can now be considered the "buyer of last resort". In November , economist Dean Baker observed:.

There is a really good reason for tighter credit. Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression. This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. On the other hand, a homeowner who has no equity is a serious default risk. In the case of businesses, their creditworthiness depends on their future profits.

Profit prospects look much worse in November than they did in November While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages.

Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, caused the collapse or takeover of several key firms such as Lehman Brothers , AIG , Merrill Lynch , and HBOS. The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures , declines in various stock indexes, and large reductions in the market value of equities [] and commodities.

Both MBS and CDO were purchased by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. Moreover, the de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade.

World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. Several commentators have suggested that if the liquidity crisis continues, an extended recession or worse could occur.

The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection.

UBS further emphasized that this fixes only the financial crisis, but that in economic terms "the worst is still to come". At the end of October UBS revised its outlook downwards: The Brookings Institution reported in June that US consumption accounted for more than a third of the growth in global consumption between and For the first quarter of , the annualized rate of decline in GDP was Some developing countries that had seen strong economic growth saw significant slowdowns.

Bruno Wenn of the German DEG recommends to provide a sound economic policymaking and good governance to attract new investors []. The World Bank reported in February that the Arab World was far less severely affected by the credit crunch. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their large current account deficits, such as remittances, Foreign Direct Investment FDI or foreign aid, Arab countries were able to avoid going to the market in the latter part of This group is in the best position to absorb the economic shocks.

They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest effect of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments.

Significantly lower oil prices could cause a reversal of economic performance as has been the case in past oil shocks. Initial impact will be seen on public finances and employment for foreign workers. The average hours per work week declined to 33, the lowest level since the government began collecting the data in With fewer resources to risk in creative destruction, the number of patent applications flat-lined. Compared to the previous 5 years of exponential increases in patent application, this stagnation correlates to the similar drop in GDP during the same time period.

Typical American families did not fare as well, nor did those "wealthy-but-not wealthiest" families just beneath the pyramid's top. On the other hand, half of the poorest families did not have wealth declines at all during the crisis.

The Federal Reserve surveyed 4, households between and , and found that the total wealth of 63 percent of all Americans declined in that period. On November 3, , the European Commission at Brussels predicted for an extremely weak growth of GDP, by 0. On November 6, the IMF at Washington, D. On the same day, the Bank of England and the European Central Bank , respectively, reduced their interest rates from 4. As a consequence, starting from November , several countries launched large "help packages" for their economies.

Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit.

Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The US Federal Reserve and central banks around the world took steps to expand money supplies to avoid the risk of a deflationary spiral , in which lower wages and higher unemployment led to a self-reinforcing decline in global consumption.

In addition, governments enacted large fiscal stimulus packages, by borrowing and spending to offset the reduction in private sector demand caused by the crisis. The US Federal Reserve's new and expanded liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity.

This credit freeze brought the global financial system to the brink of collapse. The response of the Federal Reserve, the European Central Bank , the Bank of England and other central banks was immediate and dramatic. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. However, banks instead were spending the money in more profitable areas by investing internationally in emerging markets.

Banks were also investing in foreign currencies, which Stiglitz and others point out may lead to currency wars while China redirects its currency holdings away from the United States. Governments have also bailed out a variety of firms as discussed above, incurring large financial obligations. To date, various US government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending.

United States President Barack Obama and key advisers introduced a series of regulatory proposals in June The proposals address consumer protection, executive pay , bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives , and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others. The proposals were dubbed "The Volcker Rule ", in recognition of Paul Volcker , who has publicly argued for the proposed changes.

The US Senate passed a reform bill in May , following the House, which passed a bill in December These bills must now be reconciled. The New York Times provided a comparative summary of the features of the two bills, which address to varying extent the principles enumerated by the Obama administration.

European regulators introduced Basel III regulations for banks. Major banks suffered losses from AAA-rated created by financial engineering which creates apparently risk-free assets out of high risk collateral that required less capital according to Basel II.

Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis. At least two major reports were produced by Congress: Anatomy of a Financial Collapse released April As of September , no individuals in the UK have been prosecuted for misdeeds during the financial meltdown of As of , in the United States, a large volume of troubled mortgages remained in place.

It had proved impossible for most homeowners facing foreclosure to refinance or modify their mortgages and foreclosure rates remained high. The US recession that began in December ended in June , according to the US National Bureau of Economic Research NBER [] and the financial crisis appears to have ended about the same time.

In April TIME magazine declared "More Quickly Than It Began, The Banking Crisis Is Over. The New York Times identifies March as the "nadir of the crisis" and noted in that "Most stock markets around the world are at least 75 percent higher than they were then. Financial stocks, which led the markets down, have also led them up. The distribution of household incomes in the United States has become more unequal during the post economic recovery , a first for the US but in line with the trend over the last ten economic recoveries since The financial crises generated many articles and books outside of the scholarly and financial press, including articles and books by author William Greider , economist Michael Hudson , author and former bond salesman Michael Lewis , Kevin Phillips , and investment broker Peter Schiff.

In May , a documentary, Overdose: A Film about the Next Financial Crisis , [] premiered about how the financial crisis came about and how the solutions that have been applied by many governments are setting the stage for the next crisis. The film is based on the book Financial Fiasco by Johan Norberg and features Alan Greenspan , with funding from the libertarian think tank The Cato Institute.

Greenspan is responsible for de-regulating the derivatives market while chairman of the Federal Reserve. In October , a documentary film about the crisis, Inside Job directed by Charles Ferguson , was released by Sony Pictures Classics. In , it was awarded the Academy Award for Best Documentary Feature at the 83rd Academy Awards. Time magazine named "25 People to Blame for the Financial Crisis". Michael Lewis published a best-selling non-fiction book about the crisis, entitled The Big Short.

In , it was adapted into a film of the same name , which won the Academy Award for Best Adapted Screenplay. One point raised is to what extent those outside of the markets themselves i.

Subsequent to the crisis itself some observers furthermore noted a change in social relations as some group culpability emerged. Advanced economies led global economic growth prior to the financial crisis with "emerging" and "developing" economies lagging behind. The crisis overturned this relationship. The twenty largest economies contributing to global GDP growth — [].

The initial articles and some subsequent material were adapted from the Wikinfo article Financial crisis of — [ dead link ]. From Wikipedia, the free encyclopedia.

This article is about the financial crisis that peaked in For the global recession triggered by the financial crisis, see Great Recession. Subprime crisis impact timeline s energy crisis United States housing bubble United States housing market correction Financial crisis of —08 Great Recession of —09 Automotive industry crisis of —10 Financial Crisis Inquiry Commission Dodd—Frank Wall Street Reform and Consumer Protection Act.

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