17 May. “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” — Fed chief Ben Bernanke speaking to the board of the Federal Reserve of Chicago.

20 June. Merrill Lynch seizes $800 million in assets from two troubled Bear Stearns hedge funds, raising doubts about whether the funds will survive. Two days later, Bear Stearns bails out the High-Grade Structured Credit Strategies Fund to the tune of $3.2 billion. Bloomberg reports:

“More than a Bear Stearns issue, it’s an industry issue,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. Hintz was chief financial officer of Lehman Brothers Holdings Inc., the largest mortgage underwriter, for three years before becoming an analyst in 2001. “How many other hedge funds are holding similar, illiquid, esoteric securities? What are their true prices? What will happen if more blow up”

25 June. Bear Stearns reveals it will need to bail out the second fund, the High-Grade Structured Credit Strategies Enhanced Leverage Fund, leading to rumours on Wall Street and beyond about the financial health of the parent company.

19 July. Fed Chief Ben Bernanke says losses in the “fast-unravelling subprime lending market could top $100 billion, but the Federal Reserve is taking measures to protect borrowers.”

3 August. Dow Jones index finishes down 2.1%, following a fall a week earlier of over 4%. Fears spread about how many financial firms are exposed to the emerging turmoil in the US domestic mortgage market.

13 August. Leading a group of investors, US investment bank Goldman Sachs spends $US3 million bailing its Global Equity Opportunities trouble hedge fund. The BBC reports:

Market volatility developed in recent weeks as finance firms began to discover the degree to which they were exposed to the sub-prime sector, which specialises in lending to high-risk individuals with poor credit, by charging high interest rates.

As more banks have closed or frozen funds this has affected the supply of money in the market, raising fears over a looming credit crunch.

16 August. RAMS home loans groups reveals exposure to the US subprime mess. Crikey reports:

Troubled home lender RAMS Home Loans Group has failed to finance more than $6 billion in short-term debt two days after it warned that the subprime mortgage mess and credit market strains would have a “material” impact on the company’s earnings.

21 August. Formerly leading, now struggling US subprime lender Countrywide Financial gets a $2 billion dollar financial injection from Bank of America. Home repossessions and mortgage defaults are rising sharply.

6 September. BBC reports:

The European Central Bank (ECB) has moved again to boost liquidity in the banking system, after warning of fresh volatility in financial markets.

It is lending 42 billion euros (£28bn; $57bn) to banks in its latest effort to counter the global credit squeeze.

It will repeat the exercise again on 11 September for a yet unspecified amount. Central banks want to cut the cost of credit after the rates at which banks lend to each other soared because of worries about their US mortgage losses.

14 September. Depositors in UK bank Northern Rock queue up to withdraw saving amid fears the bank is poised to fail. Crikey reports:

Just when you thought it was becoming safe to go back into a bank, whoosh, a big one bites the dust. Northern Rock, Britain’s fifth biggest mortgage lender has been rescued by the Bank of England in a dramatic late night move.

24 October. The International Herald Tribune reports:

Repercussions from the subprime mortgage meltdown in the United States hit Merrill Lynch again on Wednesday, as the brokerage firm increased the amount of its write-down by more than 50 percent and reported its first quarterly loss in nearly six years.

The bank had announced this month that it expected to write down $5 billion because of losses in its fixed-income business. On Wednesday, it added $2.9 billion for a total of $7.9 billion.

Most of the losses, the bank said, were tied to the decline in value of complex debt instruments called collateralized debt obligations, or CDOs, whose value has diminished in recent months as credit markets have been hit by a collapse in the subprime mortgage market.

5 November. US banking giant Citigroup announces subprime related losses of up to $US11 billion and the resignation of CEO Charles Prince.

6 December. BBC reports:

President George W Bush has outlined plans to freeze rates on sub-prime mortgages for five years to help people hit by the US housing market crisis.

The move aims to shield homeowners most vulnerable to the impact of rising mortgage payments which it is feared could lead to a fresh wave of defaults.

This and other measures could help more than a million people, Mr Bush said. He described the housing downturn as a “serious challenge” but insisted that the economy remained “resilient”.

19 December. Morgan Stanley announces its subprime losses approach $10 billion. The Telegraph reports:

In a further sign of the shift in power to the Far East and Middle East, China’s sovereign wealth fund – China Investment Corp (CIC) — is injecting $5bn to shore up the Wall Street giant’s capital position in return for equity units that will convert into as much as 9.9pc of Morgan Stanley stock.

8 January, 2008. Bear Stearns Chief Executive Jimmy Cayne stands down but remains the company’s non-executive chairman. Vanity Fair writes:

By January many executives were openly calling for Cayne’s head. A few slipped into [Bear Stearns co-president Alan] Schwartz’s 42nd-floor office with an ultimatum: if Cayne wasn’t gone by the time bonuses were paid in late January, they would leave. Schwartz was conflicted. He loved Cayne, but he couldn’t afford to lose a group of top people, not at this point. He canvassed Bear’s board, found them open to a change, then broke the news to Cayne himself. To Schwartz’s surprise, Cayne took the news peacefully. He resigned as C.E.O. on January 8, but remained chairman of the board.

17 January. Merrill Lynch makes known $US7.8 billion in subprime related losses to the end of 2007. BBC reports:

8 February. Reuters reports:

If investors thought the market could only go up, January’s wake-up call pulled them back into reality. Standard & Poor’s, the world’s leading index provider, announced today that world equity markets lost a combined $5.2 trillion in January as emerging markets fell 12.44% and developed markets lost 7.83% to register one of the worst ever starts to a new year.

14 March. CNN reports:

Bear Stearns bailout keeps firm afloat: Shares of embattled broker plunge by as much as 53% after it says it will tap emergency funding from JPMorgan and N.Y. Fed in effort to fend off collapse.

With the credit crisis worsening, the government took action to prevent the investment bank from going under and igniting widespread panic through the financial markets.

Three days later, the BBC reports that the deal “ values Bear Stearns, which has been at the centre of the US mortgage debt crisis, at just $US236m. Its shares have lost 98% of their value since their high of $158 in April one year ago, when the bank was worth $18bn.”

18 April. Citigroup announces total losses of around $US15 on loans and investment related to the subprime market. 9000 jobs will go.

25 June. Subprime financial woes spread to Europe, with the New York Times reporting:

Barclays joined rivals in tapping the wealth of Asian and Middle Eastern investors to strengthen its capital base on Wednesday, indicating that losses from the subprime mortgage turmoil in the United States still wear on European banks.

The British bank plans to raise £4.5 billion ($8.9 billion) by selling new shares to Qatar, Singapore’s Temasek Holdings, China Development Bank and the Sumitomo Mitsui Banking Corporation of Japan. Barclays is at least the fourth British lender in the last three months to announce a share sale to shore up its capital ratios, but it is the only one to line up a handful of overseas investors to guarantee the proceeds of the sale.

11 July. IndyMac becomes the fifth US Bank to fail in 2008. CNN reports:

In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bank was taken over by federal regulators on Friday.

The operations of the Pasadena, Calif.-based bank — once one of the nation’s largest home lenders – were shut down at 3pm by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

According to the FDIC, 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

7 September. Two US mortgage giants Fannie Mae and Freddie Mac are bailed out by the US taxpayer. From the New York Times:

The Bush administration seized control of the nation’s two largest mortgage finance companies on Sunday, seeking to shrink drastically their outsize influence on Wall Street and on Capitol Hill while at the same time counting on them to pull the nation out of its worst housing crisis in decades.

The bailout plan for the companies, Fannie Mae and Freddie Mac, a seismic event in a year of repeated financial crises followed by aggressive federal intervention, places the companies in a government conservatorship, much like a bankruptcy reorganization. The plan also replaces the management of the companies.

15 September. Global insurance giant is pulled back from oblivion by the US Federal Reserve. From The Guardian:

The US government had hoped that its emergency rescue of the insurance group AIG would calm nerves on the financial markets. The Federal Reserve effectively nationalised AIG late on Monday by giving it an $85bn loan for a 79.9% stake.

15 September. A day to remember, or forget, depending upon where you work and for whom you work. The New York Times notes:

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

19 September. The Age reports that more than $19 trillion has been erased from global sharemarkets since October 31, 2007. Further:

World banks, led by the US Federal Reserve, are pumping an extra $US180 billion ($A225 billion) into global markets in a coordinated effort to avert a lock-up of the financial system.

The Fed, along with the central banks of Canada, England, Europe, Japan, and Switzerland, are auctioning off billions of US dollars to European banks in a move to ease the liquidity constraints brought on by the global credit crisis. The Reserve Bank of Australia is not participating in the cash infusion.

Peter Fray

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