Era 07 · 2007 — 2009

Global Financial Crisis

Peak to trough

−57% over 17 months

Pulse cycle

4.5s

The US subprime mortgage market cracked in 2007. It took the investment banking industry with it in 2008. Lehman Brothers filed bankruptcy on September 15; the following two weeks, the global financial system came within hours of seizing. AIG, Fannie Mae, Freddie Mac, Wachovia, and Washington Mutual were rescued in succession. $33T in global wealth was destroyed. Recovery took until 2013.

Events in this era

Sep 15, 2008

Lehman files for bankruptcy

Lehman Brothers filed Chapter 11 at 1:45 a.m. on September 15, 2008, with $639 billion in assets. It remains the largest bankruptcy in US history. A weekend of negotiations between the Fed, Treasury, Barclays, and Bank of America had failed to produce a buyer. By Monday morning, every trading desk in the world knew the details, and nobody knew which counterparty was next. The Reserve Primary Fund broke the buck within 48 hours. AIG was rescued the following day with an $85 billion Fed credit line. The commercial paper market froze.

$33T in global wealth destroyed in 6 months

Oct 3, 2008

TARP signed

Congress passed the Emergency Economic Stabilization Act after rejecting an earlier version two weeks before. The Treasury received $700B in authority to buy troubled assets. It ended up using most of it to directly recapitalize the largest banks. The Fed's balance sheet expanded from $900B to $2.2T inside three months.

Socialized losses, privatized gains

Mar 16, 2008

Bear Stearns acquired

After a weekend of negotiations, JPMorgan Chase bought Bear Stearns for $2 per share (later raised to $10), down from $172 a year earlier. The Federal Reserve provided $29 billion in non-recourse financing to facilitate the deal. Six months before Lehman. The dress rehearsal for the full crisis that the authorities did not fully recognize as a dress rehearsal.

First major US investment bank rescue of the era

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