January 2008
January’s existing home sales rate fell to its lowest level in 10 years. The 4.9 million rate was down 23.4%, according to the National Association of Realtors. Home prices fell to $201,100, down 4.6% from the prior year. Housing inventory was 4.19 million, a 10.3-month supply.
January 22: FOMC Lowers the Fed Funds Rate
The Federal Open Market Committee (FOMC) responded by lowering the fed funds rate to 3.5% on Jan. 22, 2008, then to 3.0% a week later. Millions of homeowners had taken adjustable rate mortgages with low introductory interest rates, knowing they would reset after a few years. Many planned to sell their homes before that time, but they couldn’t sell when home prices fell in 2006. Neither could they afford the higher monthly payments from the interest rate reset. They faced foreclosure as a result. There were 57% more foreclosures in January 2008 than there had been than 12 months earlier.
February 2008
Home sales continued to plummet. February’s sales fell 24% year-over-year, reaching 5.03 million, according to the National Association of Realtors. The median resale home price was $195,900, down 8.2% year-over-year. Foreclosures were up 60% year-over-year.
February 13: The Tax Rebate Bill
President Bush signed a tax rebate bill to help the struggling housing market on Feb. 13. The bill increased limits for Federal Housing Administration loans and allowed Freddie Mac to repurchase jumbo loans.
March 2008
The Fed began bailouts in March when the Chair realized that it had to take aggressive action to prevent a more serious recession. The goal was to lower Libor and keep adjustable rate mortgages affordable. In its role as “bank of last resort,” it became the only bank willing to lend during this time.
March 8: The Term Auction Facility Auction
The Fed increased its Term Auction Facility program to $50 billion. It also initiated a series of term repurchase transactions: 28-day term repurchase agreements with primary dealers. The Fed’s goal was to pump $100 billion into the economy.
March 11: Bailing Out Bond Dealers
The Fed announced on March 11 that it would lend $200 billion in Treasury notes to bail out bond dealers. They were stuck with mortgage-backed securities and other collateralized debt obligations that they couldn’t resell on the secondary market. The subprime mortgage crisis had dried up the secondary market for these debt products. The Fed tried to buy time by temporarily taking on the bad debt itself. It protected itself by only holding the debt for 28 days and only accepting AAA-rated debt.
March 14: Federal Reserve Emergency Meeting
The Federal Reserve held its first emergency weekend meeting in 30 years on March 14. It announced three days later on March 17 that it would guarantee Bear Stearns’ bad loans. It wanted JP Morgan to purchase Bear and prevent bankruptcy.
March 18: FOMC Lowers the Fed Funds Rate Again
The FOMC lowered the fed funds rate by 0.75% to 2.25% on March 18. It had halved the interest rate in six months. That put downward pressure on the dollar, which increased oil prices. Federal regulators agreed to let Fannie Mae and Freddie Mac take on another $200 billion in subprime mortgage debt on the same day. The two government-sponsored enterprises would buy mortgages from banks. They then package these into mortgage-backed securities and resell them on Wall Street. The Federal Housing Finance Board authorized the regional Federal Home Loan Banks to take an extra $100 billion in subprime mortgage debt. The loans had to be guaranteed by Fannie and Freddie Mac. Fed Chair Ben Bernanke and U.S. Treasury Secretary Hank Paulson thought this would take care of the problem, but they underestimated how extensive the crisis had become.
April 2008
The Fed lowered the rate again and bought more toxic bank debt as the year wore on.
April 7: More Money to the Term Auction Facility
The Fed again began adding to its Term Auction Facility: $50 billion on April 7 and another $50 billion on April 21.
April 30: FOMC Lowers the Fed Funds Rate Again
The FOMC lowered the fed funds rate to 2% on the last day of the month.
May 2008
The Fed auctioned another $150 billion through the Term Auction Facility.
June 2008
The Fed auctions totaled $1.2 trillion by June. The Federal Reserve lent $225 billion through its Term Auction Facility. It was a temporary stop-gap measure of adding liquidity.
July 2008
Wall Street’s fears caused Fannie Mae’s and Freddie Mac’s shares to tumble, making it more difficult for private companies to raise capital themselves. Paulson reassured talk show listeners that the banking system was solid, even though other banks might fail.
July 11: IndyMac Bank Fails
The Office of Thrift Supervision closed IndyMac Bank on July 11. Los Angeles police warned angry IndyMac depositors to remain calm while they waited in line to withdraw funds from the failed bank. The Federal Deposit Insurance Corporation (FDIC) only insured deposits up to $100,000. This was later raised to $250,000.
July 23: Paulson Speaks
Paulson made the Sunday talk show rounds. He explained the need for a bailout of Fannie Mae and Freddie Mac. The two agencies themselves held or guaranteed almost half of the $12 trillion of the nation’s mortgages.
July 30: The Housing and Economic Recovery Act
Congress passed the Housing and Economic Recovery Act on July 30. It gave the Treasury Department authority to guarantee as much as $25 billion in loans held by Fannie Mae and Freddie Mac. It also created a new regulator for Fannie and Freddie, the Federal Housing Finance Agency. It also allowed $300 billion in FHA loan guarantees, $15 billion in housing tax breaks, and $3.9 billion in housing grants.
September 2008
The FHFA allowed the Treasury to purchase preferred stock of Fannie and Freddie to keep them afloat. They could also borrow from the Treasury. The Treasury was allowed to purchase their mortgage-backed securities.
September 7: Fannie and Freddie Under Conservatorship
The FHFA placed Fannie and Freddie under conservatorship on Sept. 7. It allowed the government to run the two until they were strong enough to return to independent management. The Fannie and Freddie bailout initially cost taxpayers $187 billion, but the two paid back all costs plus an added $58 billion in profit to the general fund over time.
September 15: Lehman Brothers Bankruptcy Triggers Global Panic
Paulson urged Lehman Brothers to find a buyer, but only two banks were interested: Bank of America and British Barclays. Bank of America wanted the government to cover $65 billion to $70 billion in anticipated losses, but Paulson said no. The U.S. Treasury had no legal authority to invest capital in Lehman Brothers because Congress hadn’t yet authorized the Troubled Asset Relief Program. Lehman Brothers was an investment bank, so the government couldn’t nationalize it like it had government enterprises Fannie Mae and Freddie Mac. No federal regulator, like the FDIC, could take it over, either. Barclays announced its British regulators would not approve a Lehman Brothers deal. The financial markets reeled when Lehman’s declared bankruptcy. The Dow fell 504 points, its worst decline in seven years. U.S. Treasury bond prices rose as investors fled to their relative safety. Oil prices tanked.
September 16: The Fed Buys AIG for $85 Billion
The American International Group Inc. turned to the Federal Reserve for emergency funding. The company had insured trillions of dollars of mortgages throughout the world. The global banking system would have fallen if it had fallen. AIG took risks with cash from supposedly ultra-safe insurance policies. and used it to boost profits by offering unregulated credit default swaps. The Reserve Primary Fund “broke the buck.” It didn’t have enough cash on hand to pay out all the redemptions that were occurring.
September 17: Economy Almost Collapsed
Investors fled money market mutual funds due to losses from Lehman’s bankruptcy. They withdrew a record $172 billion from their money market accounts. Only about $7 billion is withdrawn during a typical week.
September 19: Paulson and Bernanke Meet With Congress
Paulson and Bernanke met with Congressional leaders on Sept. 19 to explain the crisis. Republicans and Democrats realized that credit markets were only a few days away from a meltdown. The leaders were prepared to work together in bipartisan fashion to craft a solution, but many rank-and-file members of Congress were not on board. Bernanke announced that the Fed would lend the money needed by banks and businesses so they wouldn’t have to pull out the cash in money market funds. This, along with the announcement of the bailout package, calmed the markets enough to keep the economy functioning.
September 20: Treasury Submits Legislation to Congress
Paulson submitted a three-page document to Congress on Sept. 20, asking that it approve a $700 billion bailout. The Treasury would use the funds to buy up mortgage-backed securities that were in danger of defaulting. Paulson wanted to take these debts off the books of banks, hedge funds, and the pension funds that held them.
September 21: The End of the “Greed Is Good” Era
Goldman Sachs and Morgan Stanley, two of the most successful investment banks on Wall Street, applied to become regular commercial banks. They wanted the Fed’s protection. The Treasury guaranteed $50 billion worth of money market funds on Sept. 21.
September 23: The Final Bailout Bill
Congressman Barney Frank, Chairman of the Housing Financial Service Committee, worked with lawmakers to negotiate a plan that cost less and offered more protection for taxpayers. These measures made it into the final bailout bill.
September 26: Washington Mutual Goes Bankrupt
Washington Mutual Bank went bankrupt when its panicked depositors withdrew $16.7 billion in 10 days. It had insufficient capital to run its business. The FDIC then took over. The bank was sold to J.P. Morgan for $1.9 billion.
September 29: The Stock Market Crashes
The stock market collapsed when the U.S. House of Representatives rejected the bailout bill. The Dow Jones Industrial Average sank 770 points. The Morgan Stanley Capital International World Index dropped 6% in one day, the most since its creation in 1970. Gold soared to over $900 an ounce, and oil dropped to $95 a barrel. The Federal Reserve doubled its currency swaps with foreign central banks in Europe, England, and Japan to $620 billion to restore financial stability.
October 2008
Congress passed the $700 billion bank bailout bill on Oct. 3, allowing the Treasury to buy shares of troubled banks. It was the fastest way to inject capital into the frozen financial system. The Troubled Asset Relief Program funds also bailed out AIG and auto companies. It restored credit markets and helped homeowners avoid foreclosure.
October 6: Global Stock Markets Collapse
Stock markets around the world plummeted despite the bailout package. Central banks stepped in to provide overnight lending capability for private banks to keep the collapse from becoming a depression.
October 7: $1.7 Trillion Commercial Loan Program
The Federal Reserve agreed to directly issue short-term loans for businesses that couldn’t get them elsewhere. Interest rates ranged from 2% to 4% in October. This was high under normal circumstances, but low compared to Libor rates at the time. The Fed bought high-quality, three-month debt. Dozens of companies signed up, including Morgan Stanley, the finance arm of General Electric, Ford Motor Credit, and GMAC Mortgage, LLC.
October 8: Central Banks Coordinate Global Action
The Federal Reserve and the central banks of the European Union, Canada, the United Kingdom, Sweden, and Switzerland all cut their rates by half a point. China’s central bank cut its rate by 0.27 of a point. This was done to lower Libor, thus lowering the cost of bank borrowing. Overnight bank lending rates dropped in response, indicating a potential turning point in the crisis. The Fed lent another $37.8 billion to AIG subsidiaries in exchange for fixed-income securities.
October 14: Unprecedented Action
The EU committed to spending $1.8 trillion to guarantee bank financing, to buy shares to prevent banks from failing, and to take any other steps that were necessary to get banks to lend to each other again. This was after the U.K. committed $88 billion to purchase shares in failing banks and $438 billion to guarantee loans. The Bank of Japan agreed to lend unlimited dollars and to suspend its bank stock selling program. The EU asked the United States to increase banking regulation. It also wanted an increased role of the International Monetary Fund. Paulson changed how he would use TARP funds in response to this global united front. He agreed to purchase equity ownership in major banks instead of purchasing toxic mortgage debt.
October 21: The Fed Lends $540 Billion
The Federal Reserve lent $540 billion to give money market funds enough cash to meet a continuing barrage of redemptions. Over $500 billion had been withdrawn from money markets since August. The Fed’s Money Market Investor Funding Facility (MMIFF) was managed by JPMorgan Chase. The MMIFF would purchase up to $600 billion of certificates of deposit, bank notes, and commercial paper that were coming due within the next 90 days. The remaining $60 billion would come from the money markets themselves. The Fed’s Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility was established on Sept. 19. It had $122.8 billion of such loans outstanding as of Oct. 15.
October 29: Another Fed Funds Rate Cut
The FOMC dramatically lowered the fed funds rate to between 0.25 points and zero on Oct. 29. It was the lowest rate in its history. It lowered the discount rate to 0.5%.
November 2008
The Fed restructured its aid package in November, reducing its $85 billion loan to $60 billion. The $37.8 billion loan was repaid and terminated. The Treasury Department purchased $40 billion in AIG preferred shares. The funds allowed AIG to retire its credit default swaps rationally and to stave off bankruptcy, and they protected the government’s original investment.
November 18: GM, Ford and Chrysler Request Bailouts
GM, Ford, and Chrysler requested $50 billion in bailout funds. Senate Majority Leader Harry Reid said the Big Three should return with “… a responsible plan that gives us a realistic chance to get the needed votes.”
November 21: An FDIC Guarantee
The FDIC agreed to guarantee up to $1.3 trillion in loans that banks made to each other. About 1.2 million unemployed workers received an extra three months of benefits.
November 25: The Treasury Partnership
The Treasury partnered with the Federal Reserve to use part of TARP to address a freeze in the consumer credit market. The $1 trillion secondary market for credit card, auto, and student loan debt had come to a standstill. The debt had been sold as asset-backed securities and investors were just as afraid to buy them as they were subprime mortgage-backed securities. The Term Asset-Backed Securities Loan Facility program kept these credit card companies afloat. The Treasury gave Citigroup a $20 billion cash infusion on the same day. This was in return for $27 billion of preferred shares yielding an 8% annual return and warrants to buy no more than 5% of Citi’s common shares at $10 per share.
November 26: More Help for Fannie Mae and Freddie Mac
The Fed announced that it planned to spend $800 billion to purchase mortgage-backed securities from Fannie Mae and Freddie Mac, as well as consumer loans. Rates for 30-year fixed mortgages fell to 5.5% from 6.38% as a result. The Fed successfully revived commercial bank lending with the Commercial Paper Facility, although activity stabilized. Many of the Fed’s programs, such as the Commercial Lending Program and a program to buy toxic credit card debt, had not yet had a chance to take effect.
December 2008
The Treasury inserted $105 billion in TARP funds into eight banks in return for preferred stock. The government would receive a 5% dividend, increasing to 9% over time. Most banks bought the government out as soon as the crisis was over.
