September 2008 saw the biggest shake-up in the U.S. financial industry since the Great Depression. On September 14, Bank of America announced plans to buy out Merrill Lynch, one of the world’s leading financial management companies. On September 15, Lehman Brothers, once the fourth largest U.S. investment bank, declared bankruptcy. With Lehman Brothers’ assets valuing more than $6 billion, it was the largest bankruptcy declaration in U.S. history. Two days later, American International Group (AIG), a major insurance corporation, received an $85 billion bailout from the U.S. Federal Reserve. On September 29, the U.S. stock exchange saw the largest single-day point drop in history.
What has caused this major economic crisis?
In the 2000s, the financial world poured billions of dollars into mortgage-backed securities, investments based on groups of hundreds or thousands of mortgages. When the U.S. housing market collapsed in the mid-2000s, millions of homeowners found themselves unable to repay their mortgages. The many financial institutions that owned mortgage-backed securities faced devastating losses. The crisis spread around the world as financial institutions lost trust in each other, unsure of which might collapse next.
In addition, Fannie Mae and Freddie Mac—two mortgage lending companies that finance nearly half of the country’s mortgages—came to the brink of financial collapse and were only saved by a U.S. government bail out. Washington Mutual and other banks that had too many bad mortgages found themselves struggling or going under.
Now the U.S. government is looking to pass a $700 billion rescue plan. The goal of the legislation is to help stabilize banks and restore confidence in the U.S. market. Governments around the world are also taking action to resolve the crisis.
Related Links
- Stocks volatile amid uncertainty
Report from the BBC covers how the financial crisis is affecting the rest of the world.
(Source: BBC, September 16, 2008) - Greenspan: Economy in “Once-in-a-Century” Crisis
Alan Greenspan predicts that the housing market will not improve until early 2009. He expects more financial firms to collapse before the crisis is over.
(Source: CNN, September 14, 2008) - Timeline: Global Credit Crunch
A timeline summarizing the events leading to the current financial crisis.
(Source: BBC, September 16, 2008) - Q&A: US $700bn bail-out plan
Article from the BBC that explains the politics and latest changes of the proposed bail-out plan.
(Source: BBC, October 1, 2008) - Finance crisis: in graphics
A variety of illustrations and graphs about the current financial crisis.
(Source: BBC, October 1, 2008)
Critical Thinking Questions
- Summarize
How did the U.S. financial situation develop to it current crisis point? - Causes and Effects
What led to the collapse of Lehman Brothers, once the fourth largest U.S. investment bank? - Compare and Contrast
Compare and contrast the events leading to the current financial crisis with events leading to the Great Depression.