A federal guarantee of 30 billion dollars for a contract between Bear Stearns and JP Morgan Chase; a federal bailout of AIG in the amount of $182 billion dollars. Later on, the United States Treasury Department sold the shares for a profit of $22.7 billion. $144.5 billion was transferred from money markets to treasury bonds. Fannie Mae and Freddie Mac guaranteed 90 percent of all mortgages, and the Treasury Department spent $439.6 billion buying bank and car stocks. By the year 2010, banks will have repaid a total of 442.6 billion dollars.
The Right Amount
The financial crisis that hit the world in 2008 was the biggest economic catastrophe to hit the world since the Great Depression in 1929. It took place in spite of the efforts made by the Federal Reserve and the Department of Treasury of the United States of America. The financial crisis ultimately resulted in the Great Recession, during which the value of homes fell by an amount greater than the price decrease experienced during the Great Depression. Even after the economic downturn ended two years ago, the unemployment rate remained above 9%. Those job seekers who have been disheartened and given up hunting for work are excluded from this count.The factors that led to the crisis
When compared to previous decades, 2006 marked the beginning of a decline in house prices. At first, real estate agents and brokers cheered. They were under the impression that the inflated real estate market would eventually cool down to a level that was more reasonable. They failed to take into account a number of important aspects, such as the fact that an excessive number of homeowners with dubious credit were granted mortgage loans, some of which was for the full amount of the home's value or more. Some others point the finger at the Community Reinvestment Act, which encouraged financial institutions to make investments in low-income neighborhoods. According to the findings of multiple studies conducted by the Federal Reserve, it did not result in an increase in hazardous lending. Some people placed the blame for the entire disaster on Fannie Mae and Freddie Mac. According to them, the problem may be solved by either dismantling or privatizing the two agencies. They guarantee the vast majority of mortgages, if they were to go out of business, the housing market would come crashing down. One of the primary underlying causes of the financial crisis was the deregulatory movement that occurred in the derivatives market of the financial sector. The legislation that was passed to deregulate the banking system was two. They made it possible for banks to invest in derivatives tied to the property market. Because these intricate financial products generated such high profits, banks were enticed to lend money to borrowers with an increasingly high level of risk. The crisis was a direct result of this instability. The Financial Services Modernization Act of 1999, which is also known as the Gramm-Leach-Bliley Act, gave banks permission to use customer deposits to buy derivatives. Lobbyists for financial institutions said that they needed this reform in order to compete with businesses from other countries. They guaranteed that they would protect their clients by investing exclusively in low-risk securities. These banks broke their pledge because they were too focused on competing in the lucrative derivatives market. As a result of the Commodity Futures Modernization Act, derivatives were freed from the control of regulatory agencies. In addition, it preempted any regulations that the state may have had. These large financial institutions possessed the necessary resources to successfully manage these intricate derivatives. Mortgage-backed securities, also known as MBS, were the financial instruments that had the most influence on the housing market. The success of mortgage-backed securities (MBS) has led to an increase in demand for the underlying mortgages. The underlying mortgages had been sliced up by the banks and resold in tranches, it was impossible to determine the value of the derivatives. The mortgage-backed securities were owned by hedge funds and other financial institutions from throughout the world. However, these investments were also held in mutual funds, corporate assets, and pension funds. Conservative pension funds bought these high-risk assets because they were under the impression that they were protected by an insurance contract known as credit default swaps. When the value of the underlying derivatives dropped, the insurance company, American Insurance Group (AIG), was unable to honor all of the swaps they had sold because they did not have sufficient cash flow. When financial institutions understood that they would be required to take on the losses in 2007, they began to experience widespread panic and stopped lending money to one another. They did not want other banks to offer them worthless mortgages as security, which led to an increase in the cost of interbank borrowing, which is referred to as Libor. Through its Term Auction Facility, the Federal Reserve began injecting liquidity into the banking sector. However, this alone was not sufficient.The Price Paid for the Crisis
The breakdown of how much money was lost as a result of the financial crisis in 2008 is shown in the chart below. In March of 2008, investors began selling their shares in the investment bank Bear Stearns because the company held an excessive amount of toxic assets, which marked the beginning of the timeline for the 2008 financial crisis. Bear went to JP Morgan Chase for help, but the Federal Reserve was required to sweeten the deal with a guarantee of $30 billion in order for it to go through. The predicament on Wall Street became increasingly dire during the course of the summer of 2008. At the time, Congress gave the Treasury Secretary the authority to take over the mortgage businesses of Fannie Mae and Freddie Mac, which at the time would have cost the government $187 billion. A bailout loan in the amount of $85 billion was given to AIG by the Fed on September 16, 2008. The Federal Reserve and the Treasury Department reorganized the bailout during the months of October and November, bringing the total sum to 182 billion dollars. When the last of the government's AIG shares were sold off in 2012, the sale brought in a profit of $22. billion for the Treasury. The financial crisis caused a run on money market funds on September 17, 2008, which is where businesses kept their extra cash in order to collect interest on it overnight. Banks subsequently exploited those funds in order to make short-term loans. Companies shifted a record $172 billion out of their money market accounts and into even safer Treasury bonds during the run. If the country's money market accounts had gone bankrupt, commercial operations and the economy as a whole would have come to a complete standstill. Because of this problem, the government needed to take significant action. On the sixth day after those three days, Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke presented a bailout plan to Congress that totaled 700 billion dollars. Their prompt response assisted in putting an end to the run, but Republicans held up the bill for two weeks because they were opposed to providing financial assistance to financial institutions. They didn't vote for the law until October 1, 2008, well after the world's financial markets were on the verge of collapse.TARP stands for the Troubled Asset Relief Program.
The $700 billion price tag for the rescue plan was never fully passed on to taxpayers. In total, the Treasury Department spent 441.8 billion dollars from the Troubled Asset Relief Program (TARP), and by the end of 2018, it had placed 442.7 billion dollars back into the fund, resulting in a profit of 900 million dollars. It was able to accomplish this by purchasing shares of the companies it bailed out at a time when their prices were low and then selling those shares at a time when their prices were high.The TARP money was beneficial in the following five areas:
- The preferred stocks of banks were bought with a total of $245,1 billion, which gave the banks cash.
- Automobile manufacturers were saved at a cost of $79.7 billion.
- AIG19/13 received a total of $67.8 billion from the $182 billion bailouts.
- The credit markets were stabilized to the tune of $19.1 billion. The banks were able to repay $23.6 billion, resulting in a profit of $4.5 billion.
- The Homeowner Affordability and Stability Plan gave out $30,1 billion so that mortgages20 and 21 could be changed.
Questions That Are Typically Asked (FAQs)
Which financial institutions were impacted by the crisis that began in 2008?
The impact of the financial crisis was felt all around the world. The vast majority of financial institutions were harmed, although not every institution required assistance. Bear Sterns and AIG were two of the largest financial institutions that needed government assistance during this time. Fannie Mae and Freddie Mac also needed money, so it was important to help them out.Who was sentenced to prison time for the financial crisis that occurred in 2008?
Kareem Serageldin was found guilty of using his job at Credit Suisse to hide losses in mortgage-backed securities. Because of this, he was given a thirty-month prison sentence.