Chronology of a Crisis

Even if you’re not a part of the Financial Services industry today, this stuff is important.  It’s affecting economies all over the globe, and it’s affecting you and me – no matter what we do and where we live!

A recent communique sent by one of the largest financial institutions in India, summarized it well:

The downturn in the U.S. housing market, risky lending and borrowing practices, financial innovation of credit derivatives and excessive individual and corporate leverages levels have caused multiple adverse effects on the global economy. The crisis has passed through various stages, exposing pervasive weaknesses in the global financial system and lead to the collapse of global investment banking majors from the United States.

At every point, in the financial system, there was a belief that someone – someone else – would catch mistakes and preserve the integrity of the process. The mortgage lender counted on the Wall Street investment banker, who counted on the regulator or the ratings analyst, who had assumed global investors were doing their own due diligence. As the process went badly awry, everybody assumed someone else was in control

Although the ultimate cost wouldn’t be known for years, most reasonable estimates put the tab close to USD 1 trillion.

Here are some excerpts from the best chronology I have encountered on the looming financial crisis of September 2008…

Mar 16: Struggling Wall Street investment bank Bear Stearns is sold at the fire-sale price of 236 million dollars to JP Morgan Chase, in a deal engineered by the Federal Reserve.

Sep 7: The US Treasury takes over shareholder-owned mortgage finance giants Freddie Mac and Fannie Mae and guarantees 100 billion dollars of debt for each institution.

Sep 15: – Venerable Wall Street investment bank Lehman Brothers files for bankruptcy protection after the US government refuses to bail it out.  – Rival Merrill Lynch hastily arranges to be swallowed up by Bank of America for 50 billion dollars.  – Credit rating agencies downgrade the debt of American International Group (AIG), the largest US insurance company, and its share price plunges 60.8 percent, deepening earlier losses.  – The Federal Reserve pumps 70 billion dollars into the markets.

Sep 16: The US government rescues AIG with an 85-billion-dollar loan, giving the US government a 79.9 percent stake in the company. The Fed injects another 50 billion dollars into the markets.

Sep 19: US government asks Congress for the ability to buy 700 billion dollars in bad mortgage-related debts, one of the biggest financial rescue plans in history. The Fed pumps another 20 billion dollars into the credit markets.

Sep 21: The Federal Reserve announces that Goldman Sachs and Morgan Stanley, the last big independent investment houses on Wall Street, were turning themselves into bank holding companies subject to greater regulation.

Sep 24: President George W. Bush gives a nationally televised speech warning that the “entire economy is in danger” if Congress does not approve the bailout. He invites McCain and Obama to a White House summit on the crisis.

Sept 26: Washington Mutual (WAMU) collapses in the biggest US bank failure to date. JPMorgan Chase purchases parts of WAMU for 1.9 billion dollars.

Sept 28: Lawmakers hail breakthrough in talks, releasing draft legislation for a phased bailout beginning with purchases of 250 billion dollars in toxic debt with the possibility of expanding to 700 billion dollars. Deal would impose curbs on executive pay and introduce strict oversight over the plan.

Sep 29: The House of Representatives rejects the bailout plan by a vote of 228 to 205, with Republicans leading opposition to the deal.

Source: Economic Times, India

According to the IMF:

America’s mortgage crisis has spiralled into “the largest financial shock since the Great Depression” and there is now a one-in-four chance of a full-blown global recession over the next 12 months, the International Monetary Fund warned today.

The report made it clear that there will be no early resolution to the global financial crisis.

I’ve spent the past few weeks pouring over news reports and attending talks by economists on what this crisis means for the rest of us.  The good news is that it’s not all bad news:

For one, this crisis has shown the world that the US economy is, after all, just another economy – and not impervious to the laws of Economics!  It will also mean that the ability of the US to generate capital across the world without a worry, will now be a little less taken-for-granted.  Lastly, this may just see the emergence of a new powercenter – in Asia – instead of the way things have been for decades, focused on the West.

Hopefully, some day, we’ll be able to look back at this time and laugh at the silliness of our mistakes, having learned from them so as to not repeat them again.  New mistakes, though, will be a different matter altogether…


Update: 1st Oct 2008

I just heard an economist summarize the present situation in a neat model that should help explain most financial crises.  According to her, any economic/financial crisis is about…

1. Mis-assessment of Risk
2. Mis-pricing of Credit, and/or
3. Mis-allocation of Capital


Update: 13th Oct 2008

The crisis has not abated, only got worse.  Experts suggest that it could well take more than a year for global markets, and several years for the US economy, to ride out the storm.  Meanwhile, I came across a Buffetism that’s most appropriate in these times: 

It is the time to be fearful, when others are greedy and to be greedy when others are fearful.” — Warren Buffet

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