10 Massive Government Action
The initial $700 Billion economic stimulus plan authorized by Congress was only the tip of the bailout iceberg. Between October 2008 and June 2009, the U.S. government committed more than $10 Trillion dollars to economic recovery packages. In that nine-month period, the federal government took aggressive, unprecedented action, using new and existing powers to shore up the markets, thaw the credit freeze, and stop the economic free-fall. Recovery from this crisis was still a long way off, but signs of stability started to emerge.
Worried Americans Vote & Voice Their Frustration
On November 4, 2008, one month after Congress approved the stimulus legislation, Americans voiced their frustration over the struggling economy. It had become the dominant issue in the Presidential election, overtaking the war in Iraq as the top concern among voters. Because of its potential impact on the global financial crisis, this election became the most closely-watched Presidential race in decades, not only in the United States, but around the world.
Obama Makes History, Vows Economic Fix
Barack Obama won the White House by a 53% to 46% margin, defeating Sen. John McCain and becoming the nation's first African-American President. He vowed to make sure a crisis of this magnitude never happens again. Obama wasted no time in tackling the troubled economy, laying out an ambitious agenda well before taking office. He seemed to be running the country's financial rescue, even while George Bush remained in office for the final weeks of his Presidency.
Interest Rates Cut to Near Zero
One month after Obama's election, the Federal Reserve made history by cutting interest rates to practically zero. The fed funds target rate ranged from 0 to .25%. It was the latest move in a series of drastic rate reductions that began in September 2007, when the Fed lowered rates for the first time in more than four years, in response to slowing economic conditions. During this same period, the Federal Reserve dramatically increased the money supply, known as the monetary base, by about a trillion dollars. This turned out to be a 180-degree change from the Fed's previous anti-inflation policy.
New President Unveils Ambitious Agenda
Once sworn-in, President Obama and his economic team launched a rapid-fire series of plans and proposals designed to turn the ailing economy around. They knew it would not be a quick fix. They knew it would need public and private sector support. And they knew it would require bold ideas that had never been tried before.
Government Invests in Financial Institutions
By February 2009, the Obama administration announced the government would buy stock in dozens of banks under the Treasury's Capital Purchase Program. Second, it unveiled a new Financial Stability Plan that included a public-private fund that would buy toxic assets from financial institutions. The FSP also expanded the Federal Reserve's TALF program and ramped up efforts to prevent residential mortgage foreclosures.
Citigroup Struggles to Survive, Must Break Apart
The financial institution appearing to require the most federal help and the greatest government oversight was Citigroup. The massive "financial supermarket" created over the past decade had become too big for its own good. As CEO Vikram Pandit tried to sell assets and reorganize the company into a more manageable business, the government became its biggest shareholder, taking a 34% stake in the bank. In late February 2009, despite a $45 billion dollar government investment, Citigroup stock had dropped 78% since the beginning of the year. Citi shares fell to their lowest level since November 1990, at one point trading below one dollar per share. Federal regulators debated the fate of Pandit, wondering if he should be replaced with a new chief executive. FDIC Chairman Sheila Bair reportedly pushed for Pandit's removal, while Treasury Secretary Tim Geithner reportedly lobbied to give Pandit more time to fix Citigroup.
Massive Federal Spending Aims to End Slump
On February 17, less than a month into his Presidency, Obama signed historic legislation known as the American Recovery and Reinvestment Act of 2009. The bill authorized massive government spending and targeted tax cuts in hopes of jump-starting the economy. The spending plan focused heavily on public works and infrastructure projects that would create thousands of jobs, while the tax cuts for workers making less than $250,000 put more money in consumers' pockets.
As Banks Fail, Americans Wonder What’s Safe
Americans who chose to save that extra cash wondered where to put it: was their money safer in the bank or under their mattress? The question arose on May 27, 2009 when the FDIC revealed its quarterly "problem bank" list in late February. It had grown from 171 to 252. The FDIC also revealed 25 banks had failed in 2008, the largest number since 1993, during the Savings & Loan crisis. Three months later, in the FDIC's next quarterly report, the number of "problem banks" increased again, from 252 to 305. And, the FDIC reported that 21 banks had failed in the first quarter of 2009, the most in a quarter since early 1992.
Homeowners Offered New Mortgage Help
Just one day after signing the Recovery and Reinvestment Act, the President announced a mortgage refinancing and foreclosure prevention initiative called The Homeowner Affordability and Stability Plan. It changed previous guidelines by allowing the refinancing of conforming mortgages owned or backed by Fannie Mae and Freddie Mac even if they exceeded 80% of a home's value. And, it created a $75 Billion fund to encourage lenders to modify the terms of home loans in order to reduce borrowers' monthly payments.
Treasury Increases Stake in Fannie & Freddie
Fannie and Freddie themselves needed more help, too. These GSEs, which had been seized by the federal government about six months earlier, announced massive losses. In 2008, Fannie lost $58.7 Billion, while Freddie lost $50.1 Billion. At the same time those losses were made public, the Treasury Department bought $45 Billion in Fannie and Freddie stock in order to help stabilize each company's balance sheet.
AIG Bonus Outrage Adds Insult to Injury
The financial shocks during Barack Obama's first 100 days were not over yet. AIG, the huge insurance conglomerate now 80% owned by the government, made headlines again. In early March, the Federal Reserve and Treasury restructured the government's assistance to AIG, injecting another $30 Billion in TARP money. Much more controversial news about AIG broke two weeks later, when media reports revealed the company had paid $165 million in bonuses to executives, including members of the trading unit that caused the company's collapse.
Money Recovered as AIG’s Volunteer CEO Departs
Outraged politicians, including President Obama, demanded the bonus money be blocked, forcibly recovered, or voluntarily returned. New York's Attorney General even threatened to make public the names of AIG employees who received those bonuses. Interim AIG CEO Ed Liddy, who took the job as a gesture of goodwill at a salary of only $1 a year, was called to testify before a Congressional committee. Although he had nothing to do with the bonuses, he took the heat anyway. Eventually, by March 2009, most of the money was given back. And Liddy announced he was leaving AIG, saying the company needed a new Chief Executive who could chart the firm's future.
Stress Tests Put Banks Under Microscope
Throughout the first five months of 2009, the Treasury Department continued investing in dozens of U.S. banks, buying shares of preferred stock under the department's Capital Purchase Program, part of the TARP legislation passed late in 2008. Despite the government support, some of those banks, among the country's 19 largest, were facing a new challenge: so-called "stress tests" to determine their ability to withstand a continuing economic downturn. The Treasury first announced the testing plan in February, and by May the numbers had been crunched and would soon be revealed. Nervous investors waited and wondered. Who would pass? Who would fail? Would the weaker banks become even more fragile? Would the stronger banks become even more dominant?
Test Results Reveal Stronger and Weaker Banks
Finally, the results were made public. The Treasury carefully choreographed the announcement, in hopes of avoiding an investor sell-off of bank shares or consumer runs on accounts at the less-stable banks. Of the 19 financial institutions put through the rigorous tests, the government concluded nine had adequate capital to withstand further shock, while ten needed to add a total of $185 Billion in order to buffer themselves for more adverse conditions. Each of the ten were given 30 days to develop a plan to raise the required capital.
Recession Leaves Automakers On Risky Road
In addition to banks, America's automakers were also in the administration's crosshairs. General Motors, Ford, and Chrysler had been in financial trouble for years, even decades. Now, the economic crisis triggered by the crash of the housing market had left the companies in critical condition. The recession meant few Americans could afford to buy a new car or truck. The unemployment rate was hitting multi-year highs, consumer spending was falling like a rock, and many Americans could barely buy groceries, much less a new set of wheels.
Big Three In Big Trouble, GM & Chrysler Bankrupt
The domestic automakers had been losing market share to foreign rivals for a long time, and by 2008 their sales went from bad to worse. The sales drop, coupled with huge payouts for employee and retiree health benefits, left the "Big Three" with no choice but to beg for help from the government. While all three struggled to stay in business, Ford looked the strongest. GM and Chrysler appeared on the verge of bankruptcy. Months earlier, in late 2008, their CEOs testified before Congress, laying out new business plans and asking for federal bailouts. Finally, President Obama and his Auto Task Force had lost their patience. In April and June 2009 the automakers' road to ruin took a drastic detour as the government forced Chrysler and GM into Chapter 11 bankruptcy. It was a calculated strategy to help the companies emerge leaner, with fewer models, fewer legacy costs, and fewer financial hurdles to overcome.
Dramatic Changes Start To Take Effect
By the time 2009 was half-over, the automakers were poised to emerge from bankruptcy and some of the banks that received TARP funds were ready to repay the government. The housing market showed signs of a bottom, as low mortgage rates sparked a modest increase in sales. The stock market began to reverse its slide. President Obama proposed a complete overhaul of the country's financial regulatory system. And the savings rate, which had declined for years, started to rise, indicating Americans had learned a painful, yet valuable lesson.
Economy Shows Signs of Improvement
The crisis that began exactly two years earlier with the collapse of Bear Stearns hedge funds invested in subprime mortgages wasn't over yet. But the phrases "glimmers of hope" and "green shoots" started appearing in our lexicon. Perhaps the worst of the boom that went bust was finally behind us.
CNBC's anchors and reporters discuss what it's like covering the worst recession since the great depression, how close to the edge the world economy came and how we must rebuild.