2008 Financial Crisis - Lehman Brothers, Fannie Mae and Freddie Mac
Year 2008 to 2009 is an interesting and dramatic time for the financial markets, which marks the beginning of the financial tsunami that went on for a long period of time. First we have Freddie Mac and Fannie Mae taken over by the US Treasury, which is one major event contributing to the subprime mortgage crisis. Then we have the bankruptcy of Lehman Brothers which Mamudi (2008) reported to be one of the largest bankruptcy filing in US history with Lehman holding over $600 billion in assets. Then we have the collapse of investment bank Bear Stearns, the bailout of AIG and the near-bankruptcy of the country Iceland.
In 2007, many banks in US and Europe were hit by a collapse of the value of mortgage-backed securities. The investment banks and brokerages lost $175 billion of capital between the periods of July 2007 to March 2008. JP Morgan Chase rescued Bear Stearns in March 2008 with the help of $29 billion of guarantees from the Fed. By end of January 2008, $75 billion of new capital had been injected into banks. In UK, the rising cost of liquidity destroyed the business model of a large mortgage house and the Fed dropped its interest rate by 75 basis points late January. Problems were already arising but it did not occur to the world that it was going to be so drastic. In July 2007, Deutsche Bank was forced to bail out two property-based funds. In October 2007, the US Treasury encouraged Merrill Lynch, Morgan Stanley and Bank of America to set up a $70 billion fund to help ease the value of the toxic assets – unfortunately that did not work either. By the end of 2007, the world’s central banks tried to pump in large amounts of liquidity into the global financial system. On 7th September 2008, James B. Lockhart III (2008) announced the decision to place Fannie Mae and Freddie Mac into conservatorship run by the Federal Housing Finance Agency. On 15th September 2008, Lehman Brothers filed for bankruptcy, which caused a series of drastic changes in the stock
In 2007, many banks in US and Europe were hit by a collapse of the value of mortgage-backed securities. The investment banks and brokerages lost $175 billion of capital between the periods of July 2007 to March 2008. JP Morgan Chase rescued Bear Stearns in March 2008 with the help of $29 billion of guarantees from the Fed. By end of January 2008, $75 billion of new capital had been injected into banks. In UK, the rising cost of liquidity destroyed the business model of a large mortgage house and the Fed dropped its interest rate by 75 basis points late January. Problems were already arising but it did not occur to the world that it was going to be so drastic. In July 2007, Deutsche Bank was forced to bail out two property-based funds. In October 2007, the US Treasury encouraged Merrill Lynch, Morgan Stanley and Bank of America to set up a $70 billion fund to help ease the value of the toxic assets – unfortunately that did not work either. By the end of 2007, the world’s central banks tried to pump in large amounts of liquidity into the global financial system. On 7th September 2008, James B. Lockhart III (2008) announced the decision to place Fannie Mae and Freddie Mac into conservatorship run by the Federal Housing Finance Agency. On 15th September 2008, Lehman Brothers filed for bankruptcy, which caused a series of drastic changes in the stock
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