9 Global Recession
The ripple effects of the subprime securitization scandal continued simmering through the summer. It would soon boil up to become the greatest financial crisis since the Great Depression, with incredible economic, political, and social ramifications. More well-known firms would go out of business, others would be bought by competitors, or get bailed out by the government. Millions of workers across all industries and sectors would lose their jobs. And the perception of prosperity that many Americans enjoyed for years would become a bitter reality: we had spent, borrowed, and fooled ourselves into a false sense of security.
Government Seizes Fannie Mae And Freddie Mac
In July, hinting at more chaos to come, Treasury Secretary Henry Paulson asked Congress for the power to takeover mortgage giants Fannie Mae and Freddie Mac. Less than two months later, that's exactly what happened. On September 9, the federal government seized control of Fannie and Freddie and ousted the CEOs of both firms.
Lehman Rocks Wall Street, Declares Bankruptcy
The seizure of Fannie and Freddie began what would turn out to be one of the most dramatic, traumatic, and historic periods in Wall Street history. One week later, just days away from the seventh anniversary of the 9/11 attacks, Lehman Brothers collapsed into bankruptcy. Once again, risky mortgage assets were the culprit. But this time, unlike the Bear Stearns collapse six months earlier, there was no rescue, no buyer, no white knight. Behind the scenes, the feds had pushed other banks to buy Lehman. Once again, the firm proved too toxic. Nobody made a bid without assurance of government support. The Treasury Department and Federal Reserve watched Lehman implode, unable to predict the scope of the global financial damage that would follow.
Merrill’s Herd Of Running Bulls Gets Caged
While Lehman Brothers failed to find a buyer, Merrill Lynch succeeded, just in time to prevent the firm from collapsing the way some of its rivals did. Like Bear Stearns and Lehman, Merrill had invested heavily in subprime mortgage backed securities and collateralized debt obligations (CDOs). They played the most significant role in the firm's incredible earnings growth, driving Merrill to record profits of $7.6 Billion in 2006.
Merrill’s Mortgage Strategy Threatens Firm’s Survival
Merrill's CEO Stan O'Neal was so fixated on the revenue generated by the mortgage business, he didn't just want to securitize them, he wanted to originate them, too. So, in 2007, Merrill bought mortgage lender First Franklin. O'Neal's goal of vertical integration was complete. But it would soon create chaos inside the firm, as borrowers began to default on subprime loans and the market for mortgage backed products began to stall.
Bank of America Rescues Merrill From Extinction
By September 2008, Merrill Lynch was suffering huge mortgage-related losses. It's amazing run of quarterly growth hit a wall. Merrill's huge bet had backfired. And the company faced the same fate as its biggest Wall Street competitors. Merrill sold itself to Bank of America in a deal that came together the very same weekend that Lehman Brothers went belly up.
Bank Merger Goes Under Microscope
Although Bank of America's purchase of Merrill ultimately saved the company, the transaction later came under intense scrutiny because of larger-than-expected losses and controversial year-end bonuses paid to Merrill executives. CEO Stan O'Neal resigned in disgrace. His replacement, former New York Stock Exchange CEO John Thain, lasted only 13 months in the job. He later came under fire for extravagant spending on office redecoration while Merrill was bleeding cash. And, Bank of America CEO Ken Lewis was called before Congress to explain his claims that the Federal Reserve and Treasury Department pressured BofA to close the Merrill deal. The Feds denied any pressure, but revealing email chains and Lewis' testimony shed new light on the behind-the-scenes efforts to keep Merrill afloat.
“Too Big To Fail,” Feds Take Control Of AIG
Two days after Lehman's bankruptcy, the crisis spread to insurance giant AIG. It was now on the verge of failing, too. AIG bet big on Credit Default Swaps, selling insurance policies on Collateralized Debt Obligations made from subprime mortgage securitizations. When the subprime mortgages defaulted, making all those CDOs worth much less, AIG was stuck with billions in liabilities. All those policy-holders wanted their insurance payments for the failed CDOs. In order to prevent an international financial calamity, the U.S. government took an 80-percent stake in AIG. Many experts called the company "too big to fail"--- with tentacles stretched around the world, deeply embedded in the global economy.
Popular Money Market Fund Hit Hard
As the week progressed, the domino effect continued. The Primary Reserve Fund, a popular money market fund, broke the buck, meaning each dollar invested was now worth only 97 cents.
Paulson And Bernanke Issue Dire Warning
The crisis escalated with lightning speed. Treasury Secretary Paulson and Federal Reserve Chairman Bernanke held an emergency meeting with members of Congress, warning that the worst economic collapse since the Great Depression was potentially just hours away. One attendee described a moment of stunned silence when "the air literally was sucked out of the room." Paulson literally got down on bended knee and pleaded for support from Speaker of the House Nancy Pelosi.
Treasury Proposes Massive Stimulus Plan
In the days ahead, Paulson requested $700 Billion from Congress for a program intended to buy toxic assets from banks and infuse financial institutions with capital. The initial request was only three pages long and contained no rules and standards for oversight. Infuriated politicians greeted the proposal with skepticism, despite a historic meeting at the White House among President Bush and the two men battling to succeed him, Senators Barack Obama and John McCain.
Biggest Bank Failure In History: WaMu Goes Bust
At the same time as the White House gathering, another bank went bust. Washington Mutual, weighed down by mortgage-related losses, was seized by federal regulators and sold to JPMorgan Chase. It was the largest bank failure in U.S. history, caused by an old fashioned, Depression-like run on WaMu's deposits, following rumors about the bank's ability to survive. Worried account-holders flooded branches to withdraw their cash. The company that once bragged it would become "the WalMart of banking" ended up more like Woolworth's--- out of luck, out of time, and out of business.
Market Madness As Dow Falls Record 778 Points
The following week, on September 29, Congress rejected the stimulus plan. Stunned investors watched the vote second-by-second, reacted to the failed vote, and sent the stock market on a wild ride. The Dow Jones Industrial Average plunged a record 778 points, its biggest drop in history.
Wells Fargo Wins Battle To Buy Wachovia
As the bailout battle consumed Washington, a takeover battle consumed Wall Street. Citigroup and Wells Fargo both had their eyes on Wachovia, another troubled bank in search of a buyer. Citigroup thought it had a deal, but Wells Fargo ultimately won the competition for Wachovia, swallowing yet another firm that dug its own grave by aggressively lending to subprime borrowers.
Congress Approves Financial Rescue Package
The following week, Congress acted again. This time, lawmakers approved the package, known as the Troubled Asset Relief Program. It included significantly greater oversight of the $700 Billion and more specific details on how it would be used to bolster the U.S. banking system. Treasury Secretary Paulson later forced the chief executives of the nine largest American banks to accept money from the fund, known as TARP (Troubled Asset Relief Program). Paulson's "tough love" was a bitter pill for some bank bosses to swallow. But they all took the cash, some comparing it to an act of patriotism. In the following weeks and months, it would take much more than an act of patriotism to pull the country, and the world, from the grips of recession.
CNBC anchors and reporters explain how the U.S. economic downturn had a massive ripple effect on world markets.