Wall Street and the Financial Crisis: Anatomy of a Financial Collapse

II. BACKGROUND

H. Financial Crisis Timeline

This Report reviews events from the period 2004 to 2008, in an effort to identify and explain four significant causes of the financial crisis. A variety of events could be identified as the start of the crisis. Candidates include the record number of home loan defaults that began in December 2006; the FDIC's March 2007 cease and desist order against Fremont Investment & Loan which exposed the existence of unsafe and unsound subprime lending practices; or the collapse of the Bear Stearns hedge funds in June 2007. Still another candidate is the two-week period in September 2008, when half a dozen major U.S. financial institutions failed, were forcibly sold, or were bailed out by U.S. taxpayers seeking to prevent a collapse of the U.S. economy.

This Report concludes, however, that the most immediate trigger to the financial crisis was the July 2007 decision by Moody's and S&P to downgrade hundreds of RMBS and CDO securities. The firms took this action because, in the words of one S&P senior analyst, the investment grade ratings could not "hold." By acknowledging that RMBS and CDO securities containing high risk, poor quality mortgages were not safe investments and were going to incur losses, the credit rating agencies admitted the emperor had no clothes. Investors stopped buying, the value of the RMBS and CDO securities fell, and financial institutions around the world were suddenly left with unmarketable securities whose value was plummeting. The financial crisis was on.

Because of the complex nature of the financial crisis, this chapter concludes with a brief timeline of some key events from 2006 through 2008. The succeeding chapters provide more detailed examinations of the roles of high risk lending, federal regulators, credit ratings agencies, and investment banks in causing the financial crisis.

Financial Crisis Timeline |104|

December 2006:
Ownit Mortgage Solutions bankruptcy

February 27, 2007:
Freddie Mac announces it will no longer buy the most risky subprime mortgages

March 7, 2007:
FDIC issues cease & desist order against Fremont for unsafe and unsound banking

April 2, 2007:
New Century bankruptcy

June 17, 2007:
Two Bear Stearns subprime hedge funds collapse

July 10 and 12, 2007:
Credit rating agencies issue first mass downgrades of hundreds of RMBS and CDO securities

August 6, 2007:
American Home Mortgage bankruptcy

August 17, 2007:
Federal Reserve: "[M]arket conditions have deteriorated…. downside risks to growth have increased appreciably."

August 31, 2007:
Ameriquest Mortgage ceases operations

December 12, 2007:
Federal Reserve establishes Term Auction Facility to provide bank funding secured by collateral

January 2008:
ABX Index stops issuing new subprime indices

January 11, 2008:
Countrywide announces sale to Bank of America

January 30, 2008:
S&P downgrades or places on credit watch over 8,000 RMBS/CDO securities

March 24, 2008:
Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns

May 29, 2008:
Bear Stearns shareholders approve sale

July 11, 2008:
IndyMac Bank fails and is seized by FDIC

July 15, 2008:
SEC restricts naked short selling of some financial stocks

September 7, 2008:
U.S. takes control of Fannie Mae & Freddie Mac

September 15, 2008:
Lehman Brothers bankruptcy

September 15, 2008
Merrill Lynch announces sale to Bank of America

September 16, 2008:
Federal Reserve offers $85 billion credit line to AIG; Reserve Primary Money Fund NAV falls below $1

September 21, 2008:
Goldman Sachs and Morgan Stanley convert to bank holding companies

September 25, 2008:
WaMu fails, seized by FDIC, sold to JPMorgan Chase

October 3, 2008:
Congress and President Bush establish TARP

October 12, 2008:
Wachovia sold to Wells Fargo

October 28, 2008:
U.S. uses TARP to buy $125 billion in preferred stock at 9 banks

November 25, 2008:
Federal Reserve buys Fannie and Freddie assets

Notes

104. Many of these events are based upon a timeline prepared by the Federal Reserve Bank of St. Louis, "The Financial Crisis: A Timeline of Events and Policy Actions," http://timeline.stlouisfed.org/index.cfm?p=timeline. [Back]

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G. Administrative and Legislative Actions III. HIGH RISK LENDING: CASE STUDY OF WASHINGTON MUTUAL BANK

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