- Government intervention during the subprime mortgage crisis
Due to the subprime mortgage crisis, a variety of government bailouts were implemented to stabilize the financial system during late 2007 and early 2008. Governments intervened in the
United Statesand several Western European countries, such as Belgium, France, Germany, Ireland, Luxembourg, the Netherlandsand the UK.
Northern Rock had difficulty finding finance to keep the business going and approached the
Bank of Englandas lender of the last resorton the 12 September 2007. This caused mass concern about the bank's future. The Bank of Englandand the UK Governmentboth insisted that the bank was secure and would not collapse. However this failed to stop thousands of customers withdrawing around £1billion from their savings. Northern Rock's share price plummeted and intense pressure from the media, political opposition parties and customers of Northern Rock, forced the Government to nationalize Northern Rock on 17 February 2008.
Bank rescue package
Banks that are short of capital can ask to be rescued. The government will use money from tax payers to buy shares in the
banks, making them part nationalised. Banks who take the rescue packages will have restrictions on executive pay and dividends to existing shareholders.
On March 16th 2008,
J.P. Morgan Chaseannounced that it would buy Bear Stearnsfor $500 million or $2 a share [http://www.nytimes.com/2008/03/16/business/16cnd-bear.html] , those same shares a year earlier were trading at around $150. [http://www.businessweek.com/bwdaily/dnflash/content/mar2008/db20080314_993131_page_2.htm] Later, on March 24th 2008 J.P. Morgan Chaseincreased the offer to $1.2 billion or $10 a share [http://www.nytimes.com/2008/03/25/business/25bear.html] and five days later the acquisition was approved. [http://www.ft.com/cms/s/d42c01d2-2d8d-11dd-b92a-000077b07658,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fd42c01d2-2d8d-11dd-b92a-000077b07658.html%3Fnclick_check%3D1&_i_referer=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FBear_Stearns&nclick_check=1] In order for deal to go through J.P. Morgan Chaserequired [http://www.usatoday.com/money/industries/banking/2008-03-17-bear-stearns-bailout_N.htm] the Fed to issue a nonrecourse loanof $29 billion to Bear Stearns. [http://www.federalreserve.gov/newsevents/press/other/other20080627a2.pdf] [http://www.jpmorgan.com/cm/Satellite?c=JPM_Content_C&cid=1159339104093&pagename=JPM_redesign%2FJPM_Content_C%2FGeneric_Detail_Page_Template] This means that the loan is collateralized by mortgage debt [http://seekingalpha.com/article/70098-bear-stearns-bondholders-win-big] and that the government can't go after J.P. Morgan Chase's assets if the mortgage debt collateralbecomes insufficient to repay the loan. [http://seekingalpha.com/article/70098-bear-stearns-bondholders-win-big] [http://hussmanfunds.com/wmc/wmc080324.htm]
The bailout was taken in part to avoid a potential
fire saleof nearly U.S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system. [ [http://www.msnbc.msn.com/id/23662433/ JPMorgan to buy Bear Stearns for $2 a share - U.S. business - MSNBC.com ] ] [ [http://www.msnbc.msn.com/id/23638138/ After Bear Stearns, others could be at risk - U.S. business - MSNBC.com ] ] Chairman of the Fed, Ben Bernanke, defended the bailout by stating that a Bear Stearns' bankruptcy would have affected the real economy[http://www.cbsnews.com/stories/2008/04/03/business/main3991713.shtml?source=RSSattr=HOME_3991713] and could have caused a "chaotic unwinding" of investments across the US markets. [http://www.bloomberg.com/apps/news?pid=20601087&refer=worldwide&sid=a7coicThgaEE]
Independent National Mortgage Corporation (IndyMac)
Before its failure , the
Independent National Mortgage Corporation(Indymac) was the largest savings and loan associationin the Los Angelesarea and the seventh largest mortgageoriginator in the United States.  The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure in United Stateshistory [cite news |first=Andrea |last=Shalal-Esa |title=FACTBOX: Top ten U.S. bank failures |url=http://www.reuters.com/article/ousivMolt/idUSTRE48P0YC20080926 |work= Reuters|publisher= Thomson Reuters|date= 2008-09-25|accessdate=2008-09-26 ] , and the second largest failure of a regulated thrift.cite news
title=Government shuts down mortgage lender IndyMac
publisher=Associated Press (Newsday)
accessdate=2008-07-12] IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank cite web
title= IndyMac Bancorp to Liquidate
first= Lauren Tara
Fannie Mae and Freddie Mac
Federal National Mortgage Association(Fannie Mae) and the Federal Home Loan Mortgage Corporation(Freddie Mac), two large government-sponsored enterprises, are the two largest single mortgage backing entities in the United States. Between the two corporations, they back nearly half of the $12 trillion mortgages outstanding as of 2008.cite news | first = Charles | last = Duhigg | title = Loan-Agency Woes Swell From a Trickle to a Torrent | url = http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink | work = The New York Times | location = New York, New York | date = 2008-07-11 | accessdate = 2008-09-17 ] During the mortgage crises, some in the investment community feared the corporations would run out of capital. Both corporations insisted that they were financially solid, with sufficient capital to continue their businesses, but stock prices in both corporations dropped steadily nonetheless.
Due to their size and key role in the US housing market, it had long been speculated that the US Government would take action to bolster both companies in such a situation. On 30 July 2008, this speculation became reality when President Bush signed the
Housing and Economic Recovery Act of 2008. While analysts disagreed on the financial need for such a bailout, the investor confidence provided by an explicit government show of support was likely needed in any case.
On 5 September 2008, the Treasury Department confirmed that both Fannie Mae and Freddie Mac would be placed into
conservatorshipcite news | first = John | last = Poirier | coauthors = Patrick Rucker | title = Government plan for Fannie, Freddie to hit shareholders | url = http://biz.yahoo.com/rb/080906/fannie_freddie.html?.v=4 | work = Reuters| publisher = Yahoo! Finance | date = 2008-09-06 | accessdate = 2008-09-17 ] with the government taking over management of the pair.
Lehman Brothers, Merrill Lynch & Co. and AIG
Lehman Brothers and Merrill Lynch
On September 15th 2008, a day which has been dubbed
Meltdown Mondayby some News outlets,] ] the 94 year-old Merrill Lynchagreed to be acquired by Bank of Americafor $50 billion. Also on that day Lehman Brothers, facing a refusal by the federal government to bail it out, filed for Chapter 11 bankruptcy protectioncite news | first = | last = | title = Lehman Brothers: Bankruptcy filing won’t impact Tampa unit | url = http://www.bizjournals.com/tampabay/stories/2008/09/15/daily2.html | work = Tampa Bay Business Journal| publisher = American City Business Journals, Inc. | location = Tampa Bay, Florida| date = 2008-09-15 | accessdate = 2008-09-17 ] . Treasury Secretary Hank Paulsoncited moral hazardas a reason for not bailing out Lehman Brothers.]
American International Group
Goldman Sachsand JP Morgan Chasetried but failed to raise $70 billion to lend AIG.cite news | first = Justin | last = Fox | title = Why the Government Wouldn't Let AIG Fail | url = http://www.time.com/time/business/article/0,8599,1841699,00.html | work = TIME | publisher = Time Inc.| date = 2008-09-16 | accessdate = 2008-09-17 ] One day later, The Fedfound itself forced to bail out insurance giant AIG by providing an emergency credit liquidity facility of up to $85 billion,] which will be repaid by selling off assets of the company. After concluding that a disorderly failure of AIG could worsen the current financial and economic crisis,  and at the request of AIG, the Fedintervened, after AIG had demonstrated that it could not obtain financing from any source. The Federal Reserve required a 79.9 percent equity stake as a fee for service and to compensate for the risk of the loan to AIG.
The Seattle based bank holding company
Washington Mutualdeclared bankruptcy on September 26, 2008. The 120 year old company, one of the largest banking institutions in the US West, was driven into bankruptcy by the subprime crises. On the previous day, September 25, 2008, the United States Office of Thrift Supervision(OTS) announced that it closed the holding company's primary operating subsidiary, Washington Mutual Savings Bank, and had placed it into the receivershipof the Federal Deposit Insurance Corporation(FDIC). The FDIC sold the assets, all deposit accounts, and secured liabilities to JPMorgan Chase, but not unsecured debt or equity obligations. [ [http://online.wsj.com/article/SB122238415586576687.html" J.P. Morgan to Take Over Faltering WaMu"] ] Washington Mutual Savings Bank's closure and receivershipis the largest U.S. bank failure in history. [Levy, Ari; Hester, Elizabeth. [http://www.bloomberg.com/apps/news?pid=20601087&sid=aWxliUXHsOoA&refer=home "JPMorgan Buys WaMu Deposits; Regulators Seize Thrift"] . " Bloomberg L.P.". September 26, 2008. Retrieved September 26, 2008.] Kerry Killinger, the CEO from 1988 to August 2008, had been fired by the board of directors. Virtually all savings and checking account holders were not affected as the accounts were insured by the FDIC during the collapse, and subsequently transferred in whole to JPMorgan Chase. The holding company, Washington Mutual Inc was left without its major asset and equity investment, its former subsidiary Washington Mutual Savings Bank, and filed for bankrupcty the following day, the 26th.
WaMu's collapse is the largest U.S. bank failure in history. [Levy, Ari; Hester, Elizabeth. [http://www.bloomberg.com/apps/news?pid=20601087&sid=aWxliUXHsOoA&refer=home "JPMorgan Buys WaMu Deposits; Regulators Seize Thrift"] . "
Bloomberg L.P.". September 26, 2008. Retrieved September 26, 2008.]
Wachovia Corp., the fourth biggest US bank by assets, agreed on September 29, 2008 to divest all of its banking subsidiaries to CitiGroupin an all-stock transaction, scheduled to be consummated by December 31, 2008. The transaction "open bank" was facilitated by the FDICand with the concurrence of the United States Department of the Treasury, and the Board of Governors of the Federal ReserveBank. The FDIC guaranteed to Citigroup to cover any losses on the Wachovia banking portfolio greater than $42 billion, in exchange for $10 billion in preferred stock.
Emerging plan to bail out financial institutions
On 19 September 2008, the U.S. government announced a plan to purchase large amounts of illiquid, risky mortgage backed securities from financial institutions [ [http://www.ustreas.gov/press/releases/hp1149.htm Treasury - Paulson News Release] ] , which is estimated to involve at minimum, $700 billion of additional commitments. [http://www.nytimes.com/2008/09/21/business/21cong.html?hp] This plan also included a ban on short-selling of financial stocks. [ [http://money.cnn.com/2008/09/19/news/economy/paulson/index.htm?postversion=2008091910] ] The mortgage market is estimated at $12 trillion [ [http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalink NY Times] ] with approximately 9.2% of loans either seriously delinquent or in foreclosure through August 2008. [ [http://www.mbaa.org/NewsandMedia/PressCenter/64769.htm MBA Survey] ]
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