At first, no one realized that the subprime problem, which was only a fraction of the financial market, would trigger a global financial tsunami.
Time back to April 2007, the U.S. subprime crisis has paid the water. But at first, U.S. regulators were not alert enough. In a public speech that month, Henry Paulson, then US Treasury secretary, said the subprime problem was “basically under control”. A month later, Ben Bernanke, the former chairman of the Federal Reserve, told the Fed meeting: “We don’t expect the subprime market to have a significant spillover effect on other sectors of the economy or the financial system.” “
But in the end, the snowball of the subprime crisis snowballed, eventually brewing a rare global financial tsunami.
How did the storm happen?
Cause: Deficiencies in the financial system
The story began in 2001.
From the 1990s to this time, the United States had just experienced the longest period of economic expansion in history. However, the “September 11 terrorist attacks” occurred, quickly hit the enthusiasm of American investors. In response to a possible deflation and recession, the Federal Reserve quickly stepped in and cut interest rates in succession, finally saving the U.S. economy.
Falling interest rates have fuelled enthusiasm for home purchases, and the U.S. housing market has been rising since the 1990s.
“The danger of the U.S. economy is overshadowed by an unprecedented housing boom created in part by low interest rates that helped us emerge from the post-tech bubble burst and the post-9/11 slump. The housing bubble was fuelled by the expansion of subprime credit, and more loans were taken by borrowers with poor credit ratings ,or “subprime”, pushing home ownership to historic levels. Later, Henry Paulson, who was Treasury secretary in 2008, recalled in his autobiography, “The Edge of the Cliff.”
It should be noted that Mr Paulson’s reference to subprime credit refers to loans from some lenders to borrowers with poor credit and low incomes. Since the 1990s, data on Subprime loan transactions in the United States has soared. In 1994, us subprime lending was only $35 billion (less than 5 per cent of total US lending), while in 2005 it reached a staggering $625 billion (20 per cent of total US lending), almost 18 times in 11 years.
Alan Blinder, an American economist, argues in his 2008 book, When The Music Stops, that “there are two possible explanations for this explosive growth: either a large number of reputable subprime borrowers suddenly emerge in thin air or the standard of lending falls sharply.” Which one do you think it is? “
If it were just a subprime problem, it would not be so serious. But U.S. financial institutions package these subprime loans into securities products to sell in the market, making the risk of the problem infinitely magnified. Timothy Geithner, who served as chairman of the New York Fed in 2008 and later served as Treasury secretary, noted in his autobiography, “Stress Tests,” that “the center of subprime deals is California, Florida and other so-called desert states, and New York is not the center of subprime deals, but the subprime business.” That is, stimulus loans packaged into securities sold to investors, but here. “
The five biggest US investment banks, including Freddie Mac and Fannie Mae, the US government’s sponsor, joined the carnival, as well as countless financial institutions. In his book, Professor Alan Blinder says that banks’ irregularities in subprime and other mortgages, the packaging of bad mortgages by financial institutions, unregulated securities and derivatives, and the fact that data rating agencies have given the products too high lying. Making these problem assets turn into the new darling of the market.
However, the advent of the rate hike cycle has broken the logic of the bubble. Since June 30, 2004, the Fed began raising interest rates, and by June 2006 the Fed’s funds rate had reached 5.25% (until August 2007). This means that many subprime borrowers can no longer afford higher interest rates and interest rates, and these people are starting to default on their loans.
By the fourth quarter of 2006, the U.S. housing market began to fall. The rate of default on subprime mortgages in the United States has skyrocketed, triggering a wave of foreclosures and costing subprime lenders dearly. In the end, the crisis swept directly through the main underlying assets were the subprime Wall Street.
As George Soros, a prominent investor, pointed out at the time: “The remarkable feature of the current financial crisis is that it was caused not by external shocks such as higher oil prices by the Organization of the Petroleum Exporting Countries, but by the financial system itself.” “
Crisis: The Financial Tsunami Sweeping the World
“Overall, we Americans have built a fragile financial air, bit by bit, since the 1990s.
Until the financial crisis broke out in 2007. Professor Alan Blinder said in “When The Music Stopped.”
On February 7, 2007, HSBC, the world’s third-largest bank, announced a $10.6bn provision for bad debts for its holdings of US subprime products. On the same day, New Century Financial, the second-largest US subprime lender, announced a forecast loss for the fourth quarter of 2006. On 2 April 2007, the company went out of business. Two weeks later, Washington Mutual, America’s largest savings and loan bank, admitted that 95 per cent of its $217bn of loan assets were subprime loans.
Between February 2007 and March 2007, more than 25 subprime mortgage companies filed for bankruptcy.
In August 2007, Bear Stearns, America’s fifth-largest investment bank, announced the collapse of two of its hedge funds. Subsequently, Bear Stearns, Citigroup, Merrill Lynch, JPMorgan Chase, UBS and so on have burst huge losses.
In March 2008, Bear Stearns was acquired by JPMorgan Chase for illiquidity and loss of assets. It is worth emphasizing that the deal was brokered by the Fed and financed by a huge merger. But in the United States, which has always pursued a “free economic market”, the practice was criticized and controversial at the time, arguing that the government should not use taxpayers’ money to interfere with market behavior. It also set the stage for the Fed to watch Lehman Brothers, America’s fourth-largest investment bank, fail.
The Fed began slashing the discount rate and the money rate, but bad news continued to pour in.
In mid-July 2008, Freddie Mac and Fannie Mae, the US real estate mortgage giant, suffered huge losses of $70bn. At its peak, the two mortgage giants held or secured 55 per cent of the market’s total US mortgage market. Henry Paulson, the US Treasury secretary, made it clear that the “two houses” must not fall. Amid the controversy, Mr Paulson “suffered” a request from Congress to authorize the Treasury to take over the two companies.
But the domino effect is still fermenting. Lehman Brothers, which owns a large number of subprime assets in the US and the fourth-largest investment bank, is heading for bankruptcy.
On September 12, 2008, Federal Reserve Chairman Ben Bernanke, New York Fed Chairman Timothy Geithner, U.S. Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Cox convened citigroup, JPMorgan Chase, Morgan Stanley, Goldman Sachs and Merrill Lynch for three consecutive days to discuss how to save Lehman Brothers. It is worth mentioning that these institutions are also creditors of Lehman Brothers.
Details of the negotiations are documented in “Big But Not Down”, and Paulson told the audience bluntly, “Don’t expect government funding, it’s you who’s the main man to solve the problem.” “This is because, after bearthein, the Fed has been unable to allocate funds without the support of Congress. But the institutions involved in the negotiations were also in jeopardy, and after the government made it clear it would not fund it, a bitter negotiation ended in failure.
On September 15, 2008, Lehman Brothers filed for bankruptcy, making it the largest corporate bankruptcy in U.S. history, and the shock quickly swept Wall Street.
AIG, the world’s largest insurer, bore the brunt. On the day of Lehman Brothers’ collapse, the three major rating companies collectively downgraded AIG’s credit rating, and shares plunged 60 per cent on the day. AIG’s nominal balance of risk is as high as $2.7 trillion, and counterparties are demanding performance or additional collateral, and the situation is spiraling out of control. AIG has a special influence, as “Big But” states, “Both Paulson and Bernanke know that AIG has in fact become a hub for the global financial system.” “
In an emergency, Ben Bernanke announced his authority to formally take over AIG under Section 13, paragraph 3, of the Federal Reserve Act, and to issue an emergency $85 billion in loans to AIG, an amount that expanded to $182 billion a few days later.
Morgan Stanley and Goldman Sachs, the only two of america’s top five investment banks at the time, also deteriorated rapidly, with cash flowing out in large numbers. Morgan Stanley’s liquidity alone fell from $130bn to $55bn in a week. On September 21st, the Federal Reserve approved Morgan Stanley and Goldman Sachs as bank holding companies. With the change of status, Goldman Sachs and Morgan Stanley were able to set up branches of commercial banks to take deposits and have the right to get emergency loans from the Federal Reserve.
But the momentum is still growing. In the financial sector, the short-term financing market in the US has all but stagnated, banks are holding over their money and are reluctant to lend, and money-market funds are pulling out at a faster pace.
In late September 2008, Seattle-based Washington Mutual was taken over by the Federal Deposit Insurance Corporation, making it the largest bank in U.S. history to fail.
In his autobiography, “Stress Tests,” Timothy Geithner, then chairman of the New York Fed, recalls that by December 2008, the u.S. unemployment rate had climbed to 7.3 percent as companies cut jobs and cut back on investment sprees in preparation for the tougher times ahead. Circuit City, the electronics retailer, also filed for bankruptcy after Sharper Image, bedding retailer Linens’n Things and other well-known retailers filed for bankruptcy. Manufacturers such as Boeing, Caterpillar and Pfizer have announced mass layoffs.
The crisis eventually led to a global economic crisis. Global stock markets have experienced heavy losses, many countries around the world are facing a serious financial crisis, the global economy into recession.
Recovery: Tough Redemption
“Even if we run out of all available resources, we will not be able to recover from the weakness of the financial system, losses will continue to expand, capital is running out and confidence has evaporated, which has existed since the collapse of Lehman Brothers. The United States suffered several severe hurricanes in previous years, and the weekend of Lehman Brothers collapsed, I felt that a series of hurricanes were hitting the coast, but the names of these hurricanes were not Katrina, Rita or Gustav, but american aigs, Merrill Lynch, Morgan Stanley, Goldman Sachs, Washington Mutual, Bank of America, Bank of America, Citibank and so on. Ben Bernanke, then chairman of the Federal Reserve, recalled in his autobiography, Courage to Act.
“As I said on the weekend of the collapse of Lehman Brothers, let’s not fool ourselves: it’s time to turn to Congress,” Ben Bernanke says in his book. If such a serious crisis can be dealt with without taxpayers’ money and political support, there is no precedent in history. “
Ben Bernanke found then-Treasury Secretary Henry Paulson to discuss the plan, and the two then found then-President George W. Bush to persuade them to support their aggressive and unprecedented intervention in the U.S. financial system. The two then briefed Congress on the financial crisis they faced at the time.
Fortunately, at this point, the U.S. Congress has finally seen the damage of the financial crisis.
10, 2008, the United States passed the Emergency Economic Stability Act. Among them, the bill includes a $700 billion TARP program (bad debt purchase plan), which amounts to almost complete discretion to the U.S. Treasury.
Immediately after, Mr Paulson began to rush into the US banks and provide asset guarantees for Citigroup and Bank of America, reduce foreclosures, and bail out the auto industry.
Timothy Geithner, then chairman of the New York Fed, later recalled in The Stress Test that he and Ben Bernanke were almost “the most aggressive government intervention in the economy in nearly 80 years” at a meeting to inform nine banks to receive capital injections. When one bank executive questioned “why would you accept a capital injection”, he replied sternly: “Because you’re not as capital-rich as you think.” “Ultimately, after the meeting, the Wall Street giants took the capital injection.
In November, the Federal Deposit Insurance Corporation launched the Temporary Liquidity Guarantee Program
Program, TLGP), has increased liquidity in the interbank lending market.
This was followed by an unprecedented four rounds of quantitative easing, injecting liquidity into the market by buying large amounts of asset-backed securities and selling Treasury bonds.
In addition, the Fed has introduced other government-backed financing instruments, such as primary dealer credit facilities ,PDCF, and Term Lending Instruments. Facility, TSLF) et al.
When Mr. Obama took office in 2009, Congress passed the $787 billion Recovery Act, which introduced a comprehensive stimulus package.
At the same time, after several rate cuts, the Fed cut rates to near zero and remained unchanged. At the same time, the Fed has worked more closely with other central banks to inject liquidity into other countries.
The financial crisis finally came to a halt after March 2009. Since the third quarter of 2009, the U.S. economy has begun to recover, and GDP growth has finally turned positive.
However, the aftermath of the crisis has remained long gone.