Saturday, September 20, 2008

Subprime crisis impact timeline

From Wikipedia, the free encyclopedia
The subprime crisis impact timeline begins with a context that includes the Dot-com bubble, Early 2000s recession, United States housing bubble, and the bubble burst (market correction) in 2005 which resulted in the subprime crisis itself in 2007 and its consequences.

1 Context and summary
2 Specific Impacts by Firm or Sector
3 Central Bank Response Timeline
4 References
5 External links

Context and summary
1985–1991: Savings and Loan Crisis
1997 - Fred Harrison predicts some of the economic issues of the housing bubble and packaging subprime loans as an investment vehicle.
1999: Gramm-Leach-Bliley Act deregulates banking, insurance and securities into a financial services industry.
1995–2001: Dot-com bubble
1998: inflation-adjusted home price appreciation exceeds 10%/year in most West Coast metropolitan areas[1]
2001: dot-com bubble collapse
2000–2003: Early 2000s recession (exact time varies by country)
2001–2005: United States housing bubble (part of the world housing bubble)
2001: US Federal Reserve lowers Federal funds rate 11 times, from 6.5% (May 2000) to 1.75% (December 2001).[2]
2002: Annual home price appreciation of 10% or more in California, Florida, and most Northeastern states.
2004-2005: Arizona, California, Florida, Hawaii, and Nevada record price increases in excess of 25% per year.
2005–ongoing: Market correction ("bubble bursting")
2005: Boom ended August 2005. The booming housing market halted abruptly for many parts of the U.S. in late summer of 2005.
2006: Continued market slowdown. Prices are flat, home sales fall, resulting in inventory buildup. U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier.
2007: Home sales continue to fall. The plunge in existing-home sales is the steepest since 1989. In Q1/2007, S&P/Case-Shiller house price index records first year-over-year decline in nationwide house prices since 1991.[3] The subprime mortgage industry collapses, and a surge of foreclosure activity (twice as bad as 2006[4]) and rising interest rates threaten to depress prices further as problems in the subprime markets spread to the near-prime and prime mortgage markets.[5] The U.S. Treasury secretary calls the bursting housing bubble "the most significant risk to our economy."[6]
February–March: Subprime industry collapse; more than 25 subprime lenders declaring bankruptcy, announcing significant losses, or putting themselves up for sale.
April 2: New Century Financial, largest U.S. subprime lender, files for chapter 11 bankruptcy.
July 19: Dow Jones Industrial Average closes above 14,000 for the first time in its history.[7]
August: worldwide "credit crunch" as subprime mortgage backed securities are discovered in portfolios of banks and hedge funds around the world, from BNP Paribas to Bank of China. Many lenders stop offering home equity loans and "stated income" loans. Federal Reserve injects about $100B into the money supply for banks to borrow at a low rate.
August 6: American Home Mortgage files for chapter 11 bankruptcy.
August 7: Democratic presidential front-runner Hillary Clinton proposes a $1 billion bailout fund to help homeowners at risk for foreclosure [1].
August 16: Countrywide Financial Corporation, the biggest U.S. mortgage lender, narrowly avoids bankruptcy by taking out an emergency loan of $11 billion from a group of banks.[8]
August 17: Federal Reserve lowers the discount rate by 50 basis points to 5.75% from 6.25%.
August 31: President Bush announces a limited bailout of U.S. homeowners unable to pay the rising costs of their debts.[9] Ameriquest, once the largest subprime lender in the U.S., goes out of business;[10]
September 1–3: Fed Economic Symposium in Jackson Hole, WY addressed the housing recession that jeopardizes U.S. growth. Several critics argued that the Fed should use regulation and interest rates to prevent asset-price bubbles,[11] blamed former Fed-chairman Alan Greenspan's low interest rate policies for stoking the U.S. housing boom and subsequent bust[2], and Yale University economist Robert Shiller warned of possible home price declines of fifty percent.[12]
September 14: A run on the bank forms at the United Kingdom's Northern Rock bank precipitated by liquidity problems related to the subprime crisis.[13]
September 17: Former Fed Chairman Alan Greenspan said "we had a bubble in housing" [3] and warns of "large double digit declines" in home values "larger than most people expect."
September 18: The Fed lowers interest rates by half a point (0.5%) in an attempt to limit damage to the economy from the housing and credit crises.[14]
September 28: Television finance personality Jim Cramer warns Americans on The Today Show, "don't you dare buy a home—you'll lose money," causing a furor among realtors.[15]
September 30: Affected by the spiraling mortgage and credit crises, Internet banking pioneer NetBank goes bankrupt[16], and the Swiss bank UBS announced that it lost US$690 million in the third quarter.[17]
October 10: Hope Now Alliance was created by the US Government and private industry to help some sub-prime borrowers. [18]
October 15–17: A consortium of U.S. banks backed by the U.S. government announced a "super fund" of $100 billion to purchase mortgage-backed securities whose mark-to-market value plummeted in the subprime collapse.[19] Both Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson expressed alarm about the dangers posed by the bursting housing bubble; Paulson said "the housing decline is still unfolding and I view it as the most significant risk to our economy. … The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."[6]
October 31: Federal Reserve lowers the federal funds rate by 25 basis points to 4.5%.
November 1: Federal Reserve injects $41B into the money supply for banks to borrow at a low rate. The largest single expansion by the Fed since $50.35B on September 19, 2001.
December 6: President Bush announced a plan to voluntarily and temporarily freeze the mortgages of a limited number of mortgage debtors holding adjustable rate mortgages (ARM). He also ask Members Of Congress to: 1. pass legislation to modernize the FHA. 2. temporarily reform the tax code to help homeowners refinance during this time of housing market stress. 3. pass funding to support mortgage counseling. 4. pass legislation to reform Government Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae. [20].
March 14, 2008: Bear Stearns gets Fed funding as shares plummet [21].
March 16, 2008: Bear Stearns gets acquired for $2 a share by JPMorgan Chase in a fire sale avoiding bankruptcy. The deal is backed by Federal Reserve providing up to $30B to cover possible Bear Stearn losses. [22].
May 6, 2008: UBS AG Swiss bank announced plans to cut 5,500 jobs by the middle of 2009[23]
September 7, 2008: Federal takeover of Fannie Mae and Freddie Mac[24][25]
September 14, 2008: Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[26]
September 15, 2008: Lehman Brothers files for bankruptcy protection[27]
September 16, 2008: Moody's and Standard and Poor's downgrade ratings on AIG's credit on concerns over continuing losses to mortgage-backed securities, sending the company into fears of insolvency.[28][29]
September 17, 2008: The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy.

[edit] Specific Impacts by Firm or Sector
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Wall Street investment banks and other financial institutions around the world have also been affected. On June 20, 2007, Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds that were involved in securities backed by subprime loans. The two funds are now essentially worthless[30].

American Home Mortgage Investment Corporation (AHMI, Melville, New York) filed Chapter 11 bankruptcy on August 6, 2007, after a layoff of its employees the week before. Accredited Home Lenders reported on August 10 that the company expected to see up to a $60 million loss for the first quarter 2007[31].

On 8 August 2007, Mortgage Guaranty Insurance Corporation (MGIC, Milwaukee, Wisconsin) announced it would discontinue its purchase of Radian Group (Philadelphia, Pennsylvania)[32] after suffering a billion-dollar loss[33] of its investment in Credit-Based Asset Servicing and Securitization (C-BASS, New York]).[34] C-BASS is seeking to restructure its financing. The MGIC-Radian transaction would have been a $4.9 billion deal.

Later, on August 9, French bank BNP Paribas stopped valuing three of its funds and suspended all withdrawals by investors after United States subprime mortgage woes had caused "a complete evaporation of liquidity".[35]

Goldman Sachs' $8 billion Global Alpha hedge fund, its largest, reportedly lost 26% in 2007.[36] Later, on August 13, the company announced that a group of investors invested more in its Global Equity Opportunities fund by infusing $3 billion after it lost 28% of its total value in one week [4]. Also, Citigroup has reported taking $700 million in losses in its credit business in July and August 2007.[37]

On August 14, several media outlets reported that another fund, Sentinel Management Group, suspended redemptions for investors and sold off $312 million worth of assets. Three days later, Sentinel filed for Chapter 11 bankruptcy protection amid ongoing legal action with respect to this move. [38] US and European stock indices continued to fall.[39] Later that same day Thornburg Mortgage, a jumbo mortgage lender, announced they were delaying their dividend after facing margin calls and disruptions in funding mortgages in the commercial paper and asset-backed securities markets. Thornburg shares fell over 46% in trading on the NYSE.[40]

On August 15, the stock of Countrywide Financial, which is the largest mortgage lender in the United States, fell around 13% on the New York Stock Exchange, its largest one-day decline since the 1987 stock market crash, on fears that the company could face bankruptcy. This comes a day after Countrywide said foreclosures and mortgage delinquencies had risen to their highest levels since early 2002.[41]

Concerned customers of Northern Rock queuing to withdraw savings from the bank due to fallout from the subprime crisisRams Home Loans Group, an Australian lender, announced on August 16 that the company was unable to refinance short-term debt as buyers stayed away from the credit markets. The company said they were unable to sell AUD$ 6.17 billion of extendable commercial paper, which is the company's largest source of funding for loans. Rams shares fell as much as 41% on the Australian Stock Exchange.[42] A AUD$ 140 million private sector bailout by Westpac was announced on October 2 due to the lender's inability to refinance its loans. The deal valued Rams at AUD$0.40 per share.[43]

On August 29 the Australian Hedge Fund, Basis Capital's "Basis Yield Alpha Fund" applied for bankruptcy protection.[44] Investors in the fund are unlikely to get any of their money back as the fund falls under the weight of its exposure to subprime credit in the US.[45]

United States, Asian, and European stock markets also continued to struggle with the turmoil in the credit markets into early September. A report on existing home sales released on September 5 said that the number of Americans buying existing homes had dropped by its largest amount since 2001, when the report first came into existence. Earnings estimates from investment banks such as Lehman Brothers and Morgan Stanley were cut significantly. Homebuilding stocks, such as Lennar and D.R. Horton, continued to decline.[46]

On September 7, a report by the US Labor Department announced that non-farm payrolls fell by 4,000 in August 2007, the first month of negative job growth since August 2003. The number fell well short of expectations, as analysts were expecting payrolls to grow by 110,000. The Dow Jones Industrials fell by as much as 180 points on the news. Cited as a reason for the unexpected weakness in the job market are the problems in the housing and credit markets.[47]

On September 13, British bank Northern Rock applied to the Bank of England for emergency funds caused by liquidity problems.[48] Concerned customers produced "an estimated £2bn withdrawn in just three days". [5]

On October 5, Merrill Lynch announced a US$5.5 billion loss as a consequence of the subprime crisis, which was revised to $8.4 billion on October 24, a sum that credit rating firm Standard & Poor's called "startling". [49]

Businesses filing for bankruptcy Business Type Date
New Century Financial subprime lender April 2, 2007
American Home Mortgage mortgage lender August 6, 2007
Sentinel Management Group investment fund August 17, 2007 [50]
Ameriquest subprime lender August 31, 2007
NetBank on-line bank September 30, 2007[16]
Terra Securities securities November 28, 2007 [51]
American Freedom Mortgage, Inc. subprime lender January 30, 2007 [52]

[edit] Central Bank Response Timeline
Central banks around the world have begun coordinated efforts of their own to increase liquidity in their own currencies to stabilize foreign exchange rates (thus stemming a further fall in the American dollar and diminishing any incentive to sell them off) and prevent the probable significant global consequences a run on the American dollar would cause. It marks the first time the American, European, and Japanese central banks have taken such actions together since the aftermath of the September 11, 2001 terrorist attacks.[53]

As of August 10, 2007, the United States Federal Reserve (Fed) has injected a combined 43 billion USD, the European Central Bank (ECB) 156 billion euros (214.6 billion USD), and the Bank of Japan 1 trillion Yen (8.4 billion USD). Smaller amounts have come from the central banks of Australia, and Canada.[53]

Fed injected $30 billion to ensure the effective Federal funds rate trades at the target rate (it had begun to trade significantly above target). It later injected $38 billion to lower the effective federal funds rate and continued to inject various amounts thereafter.

The European Central Bank (ECB) injected €61 billion[54], and the Federal Reserve injected $68 billion into their respective banking systems on Friday, 10 August 2007 in order to calm their markets, on top of the €95 billion the ECB had injected on Thursday, 9 August 2007.[55][56][57] The Federal Reserve further injected $24 billion into the US financial system that day. On 13 August, the ECB injected another €47.67 billion into the banking system and noted that credit conditions were "normalizing" while the Bank of Japan injected another ¥600 billion.[58]

On August 17, the Federal Reserve cut the discount rate by half a percent to 5.75% from 6.25% while leaving the federal funds rate unchanged in an attempt to stabilize financial markets.[59]

A September 5 report by Barclays Capital stated that since the Federal Reserve and European Central Bank had injected funds into their respective financial systems, conditions in the credit market have gotten even worse, not better. The LIBOR rate, the interest rate that banks charge each other rose to 5.72%, the highest it had been in seven years.[60] However, the Beige Book, a survey compiled by the Federal Reserve about business conditions in different parts of the United States, concluded that the credit crunch has had a "limited" impact so far on the rest of the economy [6].

On September 6, after having already injected billions of dollars over the past weeks, "the Federal Reserve added $31.25 billion in temporary reserves to the US money markets..the latest move to keep credit markets from drying up." These reserves are temporary loans to banks, using securities as collateral. The loans must be repaid within two weeks. [61]

December 11th, Fed sets up TAF as an added tool to alleviate financial strain.

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