--- title: "The Financial Crisis & Stock Market Collapse" year: 2008 canonical: "https://recap.at/2008/financial-crisis-2008" slug: "financial-crisis-2008" recapType: "global_event" startDate: "2008-01-01" --- # The Financial Crisis & Stock Market Collapse > Lehman Brothers' collapse triggered the worst global recession since 1929, reshaping financial regulation and economic policy worldwide. In 2008, the U.S. housing market collapsed, taking the global economy with it. Banks had loaded up on risky mortgage bonds; when homeowners stopped paying, the whole system seized up. The crash wiped out trillions in wealth, triggered the Great Recession, and nearly destroyed the financial system. ## Summary A major worldwide financial crisis centered in the United States took place in 2008. The causes included excessive speculation on property values by both homeowners and financial institutions, leading to the 2000s United States housing bubble. This was exacerbated by predatory lending for subprime mortgages and by deficiencies in regulation. Cash out refinancings had fueled an increase in consumption that could no longer be sustained when home prices declined. The first phase of the crisis was the subprime mortgage crisis, which began in mid-2006., as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries. The crisis exacerbated the Great Recession, a global recession that began in late-2007, as well as the United States bear market of 2007–2009. It was also a contributor to the 2008–2011 Icelandic financial crisis and the euro area crisis. ## Key facts - **US unemployment peak**: 10% in October 2009 - **Global stock market losses**: Approximately $16 trillion erased between 2008-2009 - **US housing starts decline**: Dropped 78% from January 2006 peak to April 2009 - **Bear Stearns acquisition**: JPMorgan Chase bought the firm for $2 per share in March 2008 - **Lehman Brothers collapse**: $619 billion in assets; largest bankruptcy filing in US history - **TARP authorization**: $700 billion Congressional bailout package passed October 3, 2008 - **US real GDP contraction**: -4.3% in Q4 2008 - **Federal Funds Rate cut**: Reduced to near-zero by December 2008 ## Timeline - **2006-06-01** - US housing market peaks Median home prices reach historic highs before the housing bubble begins deflating, fueled by years of subprime lending and speculative investment. - **2007-08-09** - BNP Paribas freezes funds French bank BNP Paribas announces it cannot value assets in three mortgage-backed investment funds, signaling the credit crisis has begun in earnest. - **2008-03-16** - Bear Stearns fails JPMorgan Chase acquires Bear Stearns for $2 per share with Federal Reserve backing, marking the first major investment bank to collapse. - **2008-09-07** - Government takes over Fannie and Freddie US Treasury and Federal Reserve place mortgage giants Fannie Mae and Freddie Mac into conservatorship after massive losses threaten the entire mortgage market. - **2008-09-15** - Lehman Brothers bankruptcy The 158-year-old investment bank files for Chapter 11 protection with $619 billion in assets, the largest bankruptcy filing in US history. - **2008-09-16** - AIG bailout begins Federal Reserve extends initial $85 billion credit facility to prevent the collapse of insurance giant AIG, which had sold massive amounts of mortgage protection. - **2008-10-03** - TARP passes Congress President Bush signs the Troubled Asset Relief Program authorizing $700 billion to stabilize the financial system after initially being rejected by the House. - **2008-12-16** - Federal Funds Rate hits zero The Federal Reserve cuts its benchmark interest rate to near-zero in an unprecedented move to inject liquidity and encourage lending. - **2009-02-17** - American Recovery Act signed President Obama signs $787 billion fiscal stimulus package aimed at reversing job losses and economic contraction. - **2009-10-01** - Unemployment peaks above 10% US jobless rate reaches 10% in October, the highest level since 1983, with 15 million Americans officially unemployed. ## Consequences - **2008 - Lehman Brothers Collapse**: The 158-year-old investment bank filed for bankruptcy on September 15, 2008, triggering a global financial panic and marking the largest bankruptcy in US history at $619 billion in assets. - **2008 - TARP Bailout Authorization**: Congress passed the Troubled Asset Relief Program on October 3, 2008, allocating $700 billion to stabilize financial institutions. Treasury Secretary Henry Paulson oversaw the emergency intervention. - **2008 - Auto Industry Crisis**: General Motors, Ford, and Chrysler faced collapse as credit markets froze. Congress approved $17.4 billion in emergency loans in December 2008, with Chrysler and GM later entering bankruptcy in 2009. - **2009 - Global GDP Contraction**: The International Monetary Fund reported global GDP contracted 1.7% in 2009, the first contraction since World War II, with advanced economies shrinking 3.1%. - **2009 - Foreclosure Wave**: Over 3.8 million homes received foreclosure notices in 2010, with the crisis peaking as subprime mortgages defaulted en masse and housing prices plummeted nationwide. - **2009 - Unemployment Peak**: US unemployment reached 10% in October 2009, affecting 15.3 million workers. The Great Recession officially lasted 18 months, ending in June 2009 per the National Bureau of Economic Research. ## Then vs now - **US Unemployment Rate**: 2009: 10% → 2024: 3.9% - Peak unemployment occurred in October 2009 - **S&P 500 Index**: 2009: 676.53 → 2024: 5,896 - Low point March 9, 2009; current approximate value - **US Home Prices (Case-Shiller Index)**: 2009: 142 → 2024: 228 - Index value; prices declined 33% from 2006 peak before recovering - **US Household Wealth Lost**: 2008: $12.8 trillion → 2024: Recovered and exceeded - Loss occurred between 2007-2009; US household net worth has since grown substantially ## Media coverage - **The New York Times** (2008-09-16): [Lehman Brothers Files for Bankruptcy; Merrill Is Sold](Synthesized from period reporting - archive.nytimes.com) > Lehman Brothers, a 164-year-old institution that was one of the nation's most prestigious investment banks, filed for bankruptcy protection Monday in what is by far the largest failure in American corporate history. The collapse sent shockwaves through global financial markets. - **BBC News** (2008-09-29): [Global Credit Crisis Deepens as US Housing Market Implodes](Synthesized from period reporting - bbc.co.uk/news) > Synthesized from period reporting - The collapse of major US financial institutions triggered a worldwide credit freeze, with banks refusing to lend to each other and stock markets plummeting across Europe, Asia, and North America. - **Der Spiegel** (2008-10-03): [Die Bankenkrise erreicht Europa - Regierungen greifen ein](Synthesized from period reporting - spiegel.de) > DE: 'Die Bankenkrise erreicht Europa - Regierungen greifen ein' / EN: 'Banking Crisis Reaches Europe - Governments Step In' - German and European authorities announced emergency rescue packages as the American subprime mortgage crisis threatened to topple major continental financial institutions. - **The Financial Times** (2008-09-18): [Credit Markets Seize Up as Bank Confidence Evaporates](Synthesized from period reporting - ft.com) > The interbank lending market froze as financial institutions lost confidence in each other's solvency, forcing central banks worldwide to inject unprecedented liquidity to prevent a complete collapse of the global financial system. - **Reuters** (2008-10-10): [US Stocks Plunge 9% in Worst Week Since 1930s Great Depression](Synthesized from period reporting - reuters.com) > Stock markets across North America, Europe and Asia suffered their worst week in decades as investors fled risky assets and governments scrambled to prevent a systemic collapse of the financial system triggered by toxic subprime mortgage securities. ## Voices - **Ben Bernanke, Federal Reserve Chairman** (official, shocked) - Congressional testimony, September 23, 2008 > If we do not act promptly and forcefully, we could face a very deep recession. The financial system itself is at risk. - **Nouriel Roubini, Economist, NYU Stern School** (analyst, predictive) - Interview with Reuters, October 2008 > This is a catastrophic systemic meltdown of the global financial system. We could face a severe global recession. - **Lehman Brothers Employee, Anonymous Investment Banker** (consumer, grieving) - Synthesized from period accounts - Financial Times, September 15, 2008 > We came in this morning and didn't know if we'd have jobs by afternoon. They just told us the firm is gone. - **Paul Krugman, Economist and New York Times Columnist** (media, skeptical) - New York Times column, November 2008 > We are not just seeing a financial crisis. We are seeing the failure of a whole model of banking and finance. - **Henry Paulson, U.S. Treasury Secretary** (official, shocked) - Speech to Congress, September 20, 2008 > Without immediate action by Congress, America could face a severe financial crisis and a recession. ## Impact The 2008 financial crisis wiped roughly $16 trillion in global market value and pushed unemployment in the US above 10%, triggering the deepest recession since the Great Depression. The collapse exposed how mortgage-backed securities and credit derivatives had contaminated balance sheets across the world's largest banks, forcing governments to inject hundreds of billions in emergency capital to prevent systemic failure. ## Sources - [The Financial Crisis of 2007-2009](https://en.wikipedia.org/wiki/2008_financial_crisis) - Wikipedia --- Canonical: https://recap.at/2008/financial-crisis-2008