The Global Financial Crisis: How Did We Get Into This Mess?

PART I: The Back Story
PART II: Securitization, CDOs and Sub-Prime Mortgages
PART III: Money Market Actions Fail to Stem the Tide
PART IV: Corporate Casualties Pile Up

The first big corporation to report problems stemming from securitized sub-prime loans it had invested in was investment bank Bear Stearns. The firm informed investors in two of its hedge funds in July 2007 that their holdings had shrunk to practically zero following massive losses in May and June. The near-collapse of Bear Stearns set off a crisis of confidence in the financial industry. It was later bought for a rock-bottom price by JP Morgan Chase.

In August 2007, investors in two of French bank BNP Paribas’ funds found themselves unable to cash out, owing to a “complete evaporation of liquidity” in the market. The following month, British bank and prominent mortgage lender Northern Rock was forced to seek emergency loans from the Bank of England, and panicked depositors flocked to branches and withdrew GBP 1 billion in a single day.

Since then, a large number of corporations, both in the finance sector and other industries, have run into financial trouble. Most of the large banks have suffered huge losses, and several have received government assistance from the $700 billion TARP fund and/or been taken over by rivals or the government. The two leading mortgage lenders in the U.S. – Fannie Mae and Freddie Mac – had to be rescued by the government in September 2008. Only days later, investment bank Lehman Brothers filed for bankruptcy and was allowed by the government to fail, in a move that was widely criticized and unleashed a domino effect that crippled several other institutions.

In contrast, one of the most talked-about victims of the recession – insurance and financial-services giant AIG – was considered too big to fail. The government took an 80% stake in the company in return for a massive $85 billion loan, the day after Lehman’s demise. AIG needed even more help later on, and has so far received $182.5 billion in taxpayer money to keep it afloat.

The recession has also struck the automobile industry hard, with two of the big three carmakers receiving government help. Ford has managed without a handout so far, but both General Motors and Chrysler have had to be bailed out. 

The fallout from the global financial crisis is hitting just about every business sector in every country in the world. Nobody has a crystal ball, so it’s impossible to predict when the turnaround will come, but it seems the pain is nowhere near over. Many experts are saying that the housing market needs to recover before the U.S. economy can register a substantive improvement.