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A trader works on the floor of the New York Stock Exchange on September 15, 2008 in New York. In the afternoon, the Dow Jones Industrial Average Index dropped more than 500 points as US stocks suffered a sharp loss after the announcement by financial firm Lehman Brothers Holdings Inc. of the Chapter Protection 11 on bankruptcy.
Spencer Platt / Getty Images
The warning signs of an epic financial crisis were blinking regularly throughout 2008 – for those who were very attentive.
A clue? According to the ProQuest Journal database, the phrase "since the Great Depression" appeared in The New York Times almost twice as often in the first eight months of this year, about two dozen times, as in a regular year. As the summer was prolonged in September, these nervous references began to accumulate noticeably, speckling the columns of the big screen like a first ash fog before the ruinous arrival of the forest fires. .
In mid-September, the disaster erupted dramatically and publicly. Financial news became a headline news as hundreds of Lehman Brothers employees, who looked disproportionately, flocked to the sidewalks of Seventh Avenue in Manhattan, grabbing furniture while trying to explain to reporters events. Why did their venerable 158 year old investment bank, a Wall Street boulevard, go bankrupt? And what does that mean for most of the planet?
The superficially composed assessments emanating from Washington's policymakers did not provide any details. Treasury Secretary Hank Paulson told reporters that the financial system could survive the crisis. collapse of Lehman. In other words, the US government has decided not to bail out the firm, as for Lehman's competitor, Merrill Lynch, insurance giant American International Group (AIG) or investment bank Bear in the spring of 2008 Stearns.
Lehman, they thought, was not too big to fail.
As this system became globally interdependent, the US financial crisis caused a global economic collapse. So, what has happened?
The American dream was sold with too easy credit
The 2008 financial crisis began in the real estate market, the cornerstone of American prosperity for generations. Federal policy has clearly supported the American dream of homeownership since at least the 1930s, when the US government began to support the mortgage market. He went further after the Second World War, offering veterans cheap real estate loans through the G.I. Invoice. Politicians felt they could avoid a return to pre-war slump conditions as long as undeveloped land around cities could fill new homes, and new homes with new fixtures, and new ones. entries with new cars. All of these new purchases meant new jobs and security for future generations.
Half a century later, the mortgage market explodes. According to the National Commission's final report on the causes of the US financial and economic crisis, between 2001 and 2007, mortgage debt has increased almost as much as during the rest of the country's history. At about the same time, house prices doubled. Across the country, armies of mortgage sellers have been scrambling to get Americans to borrow more money for homes, even for potential homes. Many sellers have not asked borrowers to provide evidence of income, employment or assets. Then the sellers were gone, leaving behind a new debtor holding new keys and perhaps a slight suspicion that the deal was too good to be true.
Mortgages have been transformed into increasingly risky investments
Sellers could make these offers without investigating the suitability of the borrower or the value of the property because the lenders they represented had no intention of keeping the loans. Lenders would sell these mortgages forwards; bankers would group them into securities and peddle them to institutional investors hungry for returns that the US real estate market had generated since the 1930s. The ultimate mortgage holders would often be thousands of miles away and unaware of what was going on. they had bought. They only knew that the rating agencies had said that it was as safe as the houses had always been, at least since the depression.
The renewed interest of the 21st century to turn mortgages into securities is due to several factors. After the Federal Reserve System imposed low interest rates to avoid a recession after the terrorist attacks of September 11, 2001, ordinary investments were not very profitable. Investors therefore sought higher returns.
To meet this demand for higher yields, the US financial sector has developed mortgage-backed securities. Rating agencies, like Moody's or Standard and Poor's, have given a high rating to treated mortgage products, by rating them AAA or as well as US Treasury bonds. And the financiers have considered them reliable, indicating data and trends dating back several decades. Americans have almost always made their mortgage payments. The only problem with using these data and trends was that US laws and regulations had recently changed. The financial environment of the early twenty-first century was more like the United States before the economic crisis than after: a country on the brink of crisis.
An employee of Lehman Brothers Holdings Inc. carrying a box out of the company's headquarters after filing for bankruptcy.
Chris Hondros / Getty Images
Post-depression banking regulation was slowly destroyed
To prevent the Great Depression from happening again, the US government has subjected banks to strict regulation. Franklin Roosevelt had campaigned on this issue as part of his New Deal in 1932, telling voters that his administration would closely regulate the securities trade: "The investment bank is a legitimate concern. The commercial bank is another totally different matter. public order. I propose their separation. "
He and his party kept that promise. First, they insured the commercial banks and savers that they served through the Federal Deposit Insurance Corporation (FDIC). Then, with the banking law of 1933 (a.k.a. Glass-Steagall Act), they have separated these newly secured institutions from investment banks that have embarked on more risky financial efforts. For decades, such restrictive regulation has allowed, as the saying goes, to follow only Rule 363: pay depositors at 3%, charge 6% to borrowers and go to golf at 15h.
This stable state persisted until the late 1970s, when politicians hoping to shake off a stagnant economy pushed for deregulation. For decades, decision makers have eroded Glass-Steagall separations. Most of what was left was repealed in 1999 by congressional legislation, allowing large commercial banks, rich depositors of savers, to exploit certain parts of the financial business that, since the New Deal, was the responsibility of more specialized small businesses. Investment banks.
Investment banks plunged deep into the risk
These more agile enterprises, crowded by bigger brothers apart from the transactions they could have done once, were now looking for more risky and more complicated ways to make money. Congress gave them a way to do this in 2000, with the Commodity Futures Modernization Act, deregulating over-the-counter derivatives – securities essentially bets that two parties could privately make on the future price an asset.
Like, for example, grouped mortgages.
Investment banks are now well positioned to reap huge short-term profits by focusing on the steady rise in real estate values - and for these banks to fail when billions of their balance sheets turn out to be illusory. were sold more debt than they could afford, secured by ephemeral assets – began to default. In an ever-faster spiral, bundled mortgage securities lost their AAA credit ratings and banks went bankrupt.
Former employees of ffinancial giant Lehman Brothers lfrom the headquarters of New York City.
(Susan Watts / NY News Archive / Getty Images
The Bush administration, criticized for its bailout, released Lehman
In March 2008, the investment bank Bear Stearns began to disappear, so that the US treasury system and the US Federal Reserve system negotiated and partly financed an agreement for its acquisition by JPMorgan Chase. In September, the Treasury announced that it would save subscribers of government-supervised mortgage loans almost universally known as Fannie Mae and Freddie Mac.
President George W. Bush was a conservative Republican who, along with most of his representatives, believed in the virtues of deregulation. But in the face of a crisis, Bush and his lieutenants, including Treasury Secretary Paulson and Chairman of the Federal Reserve Ben Bernanke, decided not to bet on the lack of markets. Although they are not required by law to bail Bear, Fannie or Freddie, they did it to avoid disaster – only to be criticized by other Republican believers in deregulation. Senator Jim Bunning of Kentucky called the bailout plans a "calamity for our free trade system" and, essentially, "socialism", although this is the kind of socialism that favored Wall Street rather than workers.
Earlier this year, Paulson identified Lehman as a potential problem and spoke privately to his managing director, Richard Fuld. Months passed when Fuld could not find a buyer for his company. Exasperated by Fuld and driven by criticism from his Republican colleagues, Paulson told Treasury staff to comment – anonymously but officially – that the government would not save Lehman.
On the weekend of September 13 to 14, 2008, Lehman was clearly over, with perhaps tens of billions of dollars of overvalued assets in his balance sheets. Anyone who still held Lehman shares on the assumption that the government would bail them out would bet badly.
One of these institutions was the Reserve Management Corporation which, in September, revalued its Lehman shares to zero and then had to announce that it could no longer afford to buy back shares of its monetary fund at face value. The shares of the RMC Monetary Fund were now worth less than $ 1 each – in the language of finance, RMC had "succeeded", which no monetary fund had done before to individual investors. The money market, worth about $ 3.5 trillion, provided critical short-term financing to US companies, but now it was banks, mortgage lenders and insurance companies.
A series of bankruptcies and mergers followed as reckless investors, looking for a safe haven, withdrew their money from supposedly high-yielding vehicles. Their favorite haven: the American treasure, in bonds and notes of the world's terrified financiers, poured the liquid wealth that they had left behind. After decades of trying to push the US government out of banks, it turned out that in the end, the US government was the only trusted institution. Without capital and credit, the economy has weakened and a long slump has begun.
Eric Rauchway is the author of several books on the history of the United States, including Winter War and Money Makers. He teaches at the University of California, Davis, and you can find him on Twitter @rauchway.
History Reads is a weekly series featuring works by Team History, a group of experts and influencers, exploring the most fascinating issues in history.
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