Whenever I wade into a new topic like digital photography, gardening or what have you, I visit the local bookstore and get a "For Dummies" book to guide me. I figure that it's the best way to get up-to-speed quickly without actually looking like a dummy.
So, for those of you who want the 3-minute version of the present crisis, here it is in 20 short steps (click images to enlarge):
- In 2001, following a massive stock market and capital spending bubble, Federal Reserve Chairman Alan Greenspan worried that the U.S. faced a severe recession. He began cutting interest rates down to 1% and kept them at that level until 2004, raising them slowly only 0.25% at a time thereafter.
- With interest rates so low, the financial services industry sensed a lot of money could be made and went all in on real estate, seemingly unaware that low interest rates were masking large risks.
- Meanwhile, Americans had been anticipating a nasty downturn after the bubble burst. But, they soon realized that money lost in the stock market was more than offset by rising home prices. So, Americans continued to spend freely.
As Americans spent freely, the U.S. went further into debt with the rest of the world. Foreigners, used their dollar IOUs from these debts to start their own bubbles too.- Eventually, things started to unravel in 2006 when those that could least afford to purchase homes -- so called subprime borrowers -- started to default in the U.S., prices having run well out of their range of affordability.
- In February 2007, HSBC issued the first major warning, a harbinger of things to come, writing down tens of billions in losses from their ill-timed 2002 acquisition of U.S. subprime lender Household International. At first things looked fine and policy makers convinced themselves and the wider public that the problem was contained to subprime.
- However, when two Bear Stearns hedge funds with exposure to the US housing market blew up in June 2007, people became worried that the risks had been underestimated.
- It was in August 2007 when BNP Paribas, a large French bank, froze withdrawals in three investment funds that people began to panic. If a bank with zero obvious exposure to the U.S. mortgage sector could have this measure of difficulty, anyone could be hiding untold losses. This marked the official beginning of the credit crisis.
The result was mutual distrust amongst large banks operating in the global market for interbank loans which meant credit was hard to come by for many banks. - By September, liquidity in the interbank market was so bad that rumors were swirling about various institutions which received most of their funding in wholesale markets. One of these was Northern Rock, an aggressive British mortgage lender. The British public panicked and began lining up to pull their money out of the institution. The Bank of England was forced to bail out the company, subsequently nationalizing it altogether.
- Meanwhile U.S. housing prices continued to decline. The result was massive losses in the alphabet soup of mortgage-related derivative assets held by large global banks.
These instruments are called derivatives because their value is derived from the value in underlying assets like mortgages. The first wave of mortgage-related losses were concentrated in these instruments and investing vehicles: RMBSs (Residential Mortgage Backed Securities) CDOs (Collateralized Debt Obligations), and SIVs (Structured Investment Vehicles) and CDOs of CDOs. Merrill Lynch was the first to report a large loss, at $5.5 billion on 5 Oct 2007. Only to come back less than three weeks later on 24 Oct 2007 to say that the losses were now over $8 billion. Eventually, losses reached $500 billion a year into the crisis for all global institutions. - The Merrill losses were followed by losses at most of the large global financial institutions. Many CEOs lost their jobs and the companies were forced to raise capital. By August 2008, the amount raised was to reach $350 billion.
- The situation seemed to quiet down in early 2008. However, in March the failures of hedge funds Peloton and Carlyle Capital put the credit crisis back in full view. Another 2nd period of panic resulted in the sudden collapse of Bear Stearns, America's 5th largest investment bank. The Fed organized a takeover by JP Morgan Chase that was a catastrophic 90% loss for Bear's shareholders.
- Eventually the collapse of Bear Stearns faded and, for the third time, we were lulled into a false sense of security that the worst was over. Nevertheless, writedowns continued unabated as did capital raising. When Lehman Brothers announced a massive $3 billion loss 0n 9 Jun 2008, the crisis came into full view yet again -- much as it had when Bear Stearns' hedge funds collapsed the previous June.
- This time, market fears did not recede and the financial markets remained in a constant state of stress. Things started to unravel very quickly. IndyMac, an aggressive mortgage lender, an American version of Northern Rock, was taken over by the FDIC. And a panic was on for the third time.
- Next were the GSEs. The end result of the market panic was a questioning of the viability of Fannie Mae and Freddie Mac, the two largest mortgage lenders in the United States and at the core of the residential property market. Eventually the U.S. Government was forced to take the two companies into conservatorship.
- Afterwards, all financial shares generally came under assault. The ones considered the weakest came under the heaviest selling pressure, resulting in the collapse of Lehman Brothers. Without government support and unable to close a merger in around-the-clock negotiations at the weekend, the company filed for bankruptcy on Sep. 15.
- Merrill Lynch, the venerated US investment bank, sensing trouble, sought and received cover in a takeover by Bank of America that very same weekend.
- Financial markets smelled blood after Lehman collapsed. Apparently no company was too big to fail. So, the assault on financial service companies continued. Eventually, AIG, the largest insurance company in the world, succumbed to this pressure. The Federal Reserve, citing special considerations, bailed out the non-depositary institution.
- At this stage, we were in free fall and the entire banking system was on the verge of collapse in the United States. Global shocks had not ended either, as UK institutions were increasingly under attack as well, having been damaged by their own property bubble. At the urging of the British Prime Minister and the UK regulatory authorities, Lloyds TSB bought Britain's largest mortgage lender HBOS, which was in jeopardy of failing.
- By this time, the Feds had had enough. The time for ad hoc crisis management was at an end. Hank Paulson moved decisively and put forward his $700 billion bailout plan. It awaits congressional approval.
And that's where we stand.
For the full timeline of news, visit my credit crisis timeline. I believe it to be the most comprehensive data set of credit crisis events on the web. And I update it often.
As Americans spent freely, the U.S. went further into debt with the rest of the world. Foreigners, used their dollar IOUs from these debts to start their own bubbles too.
The result was mutual distrust amongst large banks operating in the global market for interbank loans which meant credit was hard to come by for many banks.
These instruments are called derivatives because their value is derived from the value in underlying assets like mortgages. The first wave of mortgage-related losses were concentrated in these instruments and investing vehicles: RMBSs (Residential Mortgage Backed Securities) CDOs (Collateralized Debt Obligations), and SIVs (Structured Investment Vehicles) and CDOs of CDOs. Merrill Lynch was the first to report a large loss, at $5.5 billion on 5 Oct 2007. Only to come back less than three weeks later on 24 Oct 2007 to say that the losses were now over $8 billion. Eventually, losses reached $500 billion a year into the crisis for all global institutions.
This article has 28 comments:
Spoiler Alert: The character who is the movie's manipulator, is in fact "Cramer". Throughout the movie, the antics of the TV personality Cramer, help to push much of the movie's action, but we do not know that he is also the one tormented at the movie's beginning.
As a result of their torment, the stranger, who turns out to be a low-grade money manager, discovers that his ability to convince almost any small time investor, to buy almost any equity, is almost supernatural. This newly found power of persuasion, allows him to work his way into inner both financial and media power circles. The toughs grow up to run various investment banks located on Wall Street, where their gutsy hubris, allows them to take control of various financial markets.
Cramer, meanwhile, who has always sworn revenge, positions himself in capacities where he can use his bizarre talents to "influence" large numbers of investors. He develops investment programs, founds a website, and slowly puts his master plan in place. Using the Machiavellian idea of keeping your friends close, but your enemies closer, he launches a series of ridiculous stock picks to undermine the confidence that his audience holds for him. Having properly established his buffoonery, he begins to tout "financials", telling everyone how great certain companies are run. His plan is further developed through his friendship with a man named Angelo Mozillo, whom he introduces to the power elite on Wall Street. Angelo has a few "banks" that he owns and runs, with the help of his Uncle Ponzi. They'd like to expand, and think their model would be great for all involved.
As the plan for further world dominance is at its most extended, the master manipulator throws a temper tantrum heard round the World, claiming that these great financial institutions will fail unless the Fed helps them get past a temporary funding problem, by cutting rates. The table is now set for consumer confidence to plummet and hedge fund managers to react to the "blood in the water".
Caught completely unaware, Angelo finds himself the first patsy of a cycle that will eventually take down Cramer's sworn enemies. The method being used is simple. A crisis of confidence is planted, wholesale funding drys up, share price falls, short-sellers systematically take the stock price down further, the business model is questioned, lenders charge more for credit default swaps, the increased insurance costs for default protection depletes the company's ready capital, causing capital ratios to become highly leveraged and eventually challenged by the street. Cramer continues the momentum, at every turn, by constantly writing about how unfair it is, and talking about the issue on his many TV shows. Each company has to sell assets, their stock price drops further, more short selling occurs, and the cycle goes on and on, until Bear and Lehman find themselves "imploded".
By the time Merrill figures out what is going on, he is powerless to stop the attack. He calls his childhood accomplices to warn them of what is really going on, but the clock is ticking. It's a race against time, as Merrill, Morgan and Goldman rush to find a base of capitalization, through mergers with a commercial banks that have an asset base provided by its account holders.
I won't give away the ending....it's riveting.
Possible Story Points:
There as an ambitious underwriter (Meredith Whitney) who dreams of becoming a TV personality and furthering her career. We can see her in a scene where she is talking to someone at a desk, who is in the TV industry and known to us as the manipulation character. Like "Deep Throat" in "All The President's Men", we have an unknown, shadowy character that moves the action, throughout the movie. Although his exact identity is unknown to us, we do know that he is a power player with roots in TV and finance. The shadow figure in this scene, nods his understanding of Meredith's ambitions and reaches into a drawer. He pulls out a post-it laden annual report for Merrill Lynch, which he places on the desk and slides to her. We later have a scene where we see her on TV talking about balance sheets of investment banks, literally blowing the whistle on their "mark to fantasy" Level 3 assets. As the camera pulls back from the TV, we see that we are watching the TV with the shadowy figure, who nods with approval.
Another plot twist can be the scene where Goldman and Morgan find out from Merrill, about the plot against them. They immediately go into action, shorting each other's stock, their shark-like tactics putting each other in even greater danger.
Another key scene would involve the cloaked character, placing a phone call to Treasury Secretary Paulson in mid-2006, telling him in a disguised voice about a plot to undermine capitalism. Paulson rushes to re-form the PPT, and the Paulson character can then helps push the action throughout the movie. The mere existence of the PPT, helps to create the panic that the PPT was formed to fight.
We know the cloaked character is probably the homeless man left for dead in a dumpster at the start of the movie, but never realize it's Cramer until the end of the movie. We do know that Cramer is in the "Eye of the Hurricane", as a TV financial personality, but believe he is sincerely trying to help his friends on Wall Street. It is not until the movie's end that we realize that the shadow manipulator is in fact Cramer, and this helps us understand the TV personality Cramer's actions. Classic thriller ending.
www.bloomberg.com/apps...
You can believe Cramer and his "VIX over 40 means the bottom" theory, or look at the TED Spread via the link and know that we're in for one hell of an October. Here's your "investment site" advice...duck and cover.
We have been running a trade deficit for years upon years, and the value of our work has been going down in the world....the result has been that our salaries have been effectly going down, and had we not come across the magic bullet of "outsourcing", we would never have been able to keep prices down so that we could afford our own products.
But we outsourced, and got our cheap products...but in doing so, we essentially also exported our jobs....and since out actual exports were NOT keeping up with our imports, other countries ended up having to eventually loan us the money we needed to keep buying their products.....we were essentially BROKE.
Why did they do that....well, it turns out they needed us.....our value to the world was our ability to CONSUME....they wanted to build the factories and infrastructure to produce, and they needed consumers...so they "saved" their money in order to lend it back to us to keep us fat, dumb and happy.....all the time consuming their goods, and allowing them to build their infrastructure.
Well....we have not quite gotten to the point where their middle class can support their factories....but as we slip, and they progress, they are getting darn close.
If the day comes where we are NOT the biggest consumer in the world...we will NOT be needed....and we will collapse because no one will buy our dent...and we will have to pay all our debtors.
The debt to China alone is awesome.....
So the problem is surely one of debt....but much more than just housing debt and local debt.
======================...
Do you believe that the bankers did not have common sense while taking home hundreds of millions of dollars in bonuses??
Elliot Spitzer, Bear Stearns bailout, AIG - Greenberg, Lehman .......
How can anyone support this unstable lunatic???
As a long-time Republican I am embarassed for my party and its long history of fiscal discipline and social conservatism.
It has become a party of fringe religious lunatics[Sarah Palin and her witchcraft minister] as well as a Senator who has not released his medical records. At first, I though it was because of his medical history with cancers. I am beginning to think there may be certain medical records relating to his mental instability. Well, if he keeps behaving as he has, we do not need doctors to tell us he's nuts-we are seeing it!!!
BTW, the writer forgot to mention that the insistence on "Free Markets-No Regulation" by McCain and others that has allowed the crazy environment of CDO's/CMO's, etc.
Capitalism needs regulation if we are to have a level-playing field, and that is what was missing here. What has happened here, is akin to having the next World Series or SuperBowl played without rules.
We need temporary stability followed by reasonable financial markets regulation or .................?
Hey, this mess started before G.W. stole his way into office. Repub. Phil Gram guided the repeal of the Glass-Steagall Act through Congress and Bill (Republican lite) Clinton signed the repeal into law. Lack of regulation caused this mess Harrison's chronology of events starts WAY too late.
it's needed and there isn't any worry about anyone failing. Long after the appropriate regulations are determined the banking system returns to a highly regulated "Free" market system. End of problem.
If the US are so close to an financial Armagedon, why does Paulson fears so much about the banks "so in need" executives disregarding the bail out in case there would be too much demands from congress ?
Why does he ask being above the law whatever he does with the money recieved ?
How is it that the major banks are still paying dividends to sharehorlders if their situation is so scary ?
How is it that it all comes weeks before the elections ?
Please answer thoses questions, as i am not from the US...
However considering the last 8 years of this administration, would it be that stupid to consider that the executive (presidency) only want the money to get rid of congress ? After the home security bill, it seems that the only power left to congress is the budget...
Well maybe it's a bit over the top...but if we were really at the brink of Armagedon, the SP500 and the DOW shouldn't be the most resilent market place of the first world (Europe is down 25-30%, China, India 60-50%, etc), Big Banks shouldn't be paying dividends, unemployement should be well over 6.1%, GDP should be negative, etc...
So why is Paulson so affraid that his plan COULD be rejected by the banks ?
Well it's getting late
they have been eliminated from S.S. on certain stocks, but that's only
caused them to go out into fresh waters. I am asking, if this activity isn't brought under control across the board, i.e., limited volume, limited short sells as a percentage of holdings, etc., are we stuck in a quicksand of market averages that will keep being be pulled down to current levels for two or three years to come ( if we don't "crash" before then ) ?
You forgot Gramm/leach/bliley. Started the deregulation BS. Republicans are largely at fault. Their ideology has destroyed a great country.
which ended in 1980, when Reagan proceeded to triple the national debt.
or maybe earlier than that, since the dollar came unhinged from anything sensible during the Nixon administration.
Eh, there's enough blame to go around. Neocons, Republicans, I'm even betting there's a couple of Communists and Libertarians we could throw into the mix if we tried hard enough.
anyway, edward, this was a great piece of work and you carefully avoided throwing opinions around. thank you.
If you want to control a country, control it's money.
The most efficient way to get and keep power is to get the citezenry to give it to you.
The most efficient way to get people to give you power is to make them dependant upon you.
The most efficient way to make people dependant on you, is to erode the concept of self dependence, personal responsibility, and ultimately, self determination.
Crises and panic are tools of the state to get more power.
When this country first started, 0% of the population was dependant on the government for all, or a substantial portion of, their ability to survive. Today, about 40% of the population is dependant on government programs and/or "entitlements" for their ability to survive. At what point will the percentage enable the government to dictate the terms of everyone's life? The natural evolution of democracy inevitably leads back to tyranny, from which the original inception of democracy arose. At some point, some degree of anarchy is required. Anarchy is a perfectly reasonable option, but only when freedom is more impotant than comfort.
Who among us has ever voted for the "lesser of two evils?" Or voted for a candidate, not knowing what their core beliefs and fundemental philisophical principles were? Of the available choices for president, who here thinks they know, and agree with, their core beliefs and fundemental philisophical principles? Does anyone think that the current mechanisms of government still allow for quality governance at the Federal level? Why is the Federal government involved in anything other than protection from force or fraud?
> jack
It would have subsidized mortgages for those who can't afford them for up to 40 years;
publicmarkup.org/bill/.../
And it's an unlimited line of revolving credit - 700 billion is just the start.
This is a full fledged attempt to turn this country into a socialist one under the guise of "bailing us out".
What are they bailing us out of? A disaster that started in 1977 - as quazzy1 noted, "It started with the Community Reinvestment Act in 1977, which was substantially strengthened in 1995 by Cuomo and Clinton."
Banks were required to lend money to people who couldn't afford to pay it back. Fannie & Freddie would bundle these worthless mortgages into equities and sell them on the stock market. They consistantly cooked the books, but got away with it with help from a steady stream of crooked dem CEOs such as Jamie Gorelick, of 911 fame for putting up the wall between the FBI and CIA
www.freerepublic.com/f...
virginiavirtucon.wordp.../
who made about 26 million, Obama advisors Frank Raines www.ofheo.gov/media/pd....
and Jim Johnson
Top Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008
Name Office Party/State Total
1. Dodd, Christopher J S D-CT $133,900
2. Kerry, John S D-MA $111,000
3. Obama, Barack S D-IL $105,849
4. Clinton, Hillary S D-NY $75,550
5. Kanjorski, Paul E H D-PA $65,500
Barney Frank had his hand on Fannies.....
Democratic House Financial Services Committee Chair promoted GSEs while former 'spouse' was Fannie Mae executive
www.businessandmedia.o...
And there's one question I have - if WAMU and the F team has been sold/confiscated, why are they still trading?