what led to the stock market crash of 2008

what led to the stock market crash of 2008插图

Subprime mortgage crisis

What was the worst stock market crash in US history?

The Wall Street Crash, or better known as the Great Crash, was the American stock market crash that occurred in 1929. The crash started in September and ended in October when share prices on NYSE collapsed. It was one of the worst stock market crashes in history. The crash followed the London Stock Exchange’s crash of September.

When was the last stock crash?

There have been six major stock market crashes since 1929. In 1929 the DJIA lost 89% in 3 years, in 1973, the market lost 46% in 2 years, and in 1987 stocks dropped 35% in 4 weeks. More recently, in 2000, the Nasdaq crashed by 83%, and in 2008 the DJIA lost 54% in 16 months.

When will the stock market collapse?

“Stocks are on their last legs,” he declares, predicting that the market will plummet 80%. Indeed, in the first two to three months of 2022, it will drop more than 50%, Dent, a Harvard Business School MBA, foresees. The essential problem, he says, is that “the market bubble is expanding; the economy is slowing rapidly.”

When is the market expected to crash?

We predict the start of the next stock market crash starting around year end 2023 to 2024. Many innocent investors got burned during the Corona crash, financially and mentally because they sold at the depth of the stock market crash lows.

Why did the mortgage salesmen make these deals without investigating a borrower’s fitness or a property’s?

The salesmen could make these deals without investigating a borrower’s fitness or a property’s value because the lenders they represented had no intention of keeping the loans. Lenders would sell these mortgages onward; bankers would bundle them into securities and peddle them to institutional investors eager for the returns the American housing market had yielded so consistently since the 1930s. The ultimate mortgage owners would often be thousands of miles away and unaware of what they had bought. They knew only that the rating agencies said it was as safe as houses always had been, at least since the Depression.

What did the Glass-Steagall Act do?

the Glass-Steagall Act ), they separated these newly secure institutions from the investment banks that engaged in riskier financial endeavors.

Why did the financial sector develop mortgages?

To meet this demand for higher returns, the U.S. financial sector developed securities backed by mortgage payments. Ratings agencies, like Moody’s or Standard and Poor’s, gave high marks to the processed mortgage products, grading them AAA, or as good as U.S. Treasury bonds. And financiers regarded them as reliable, pointing to data and trends dating back decades. Americans almost always made their mortgage payments. The only problem with relying on those data and trends was that American laws and regulations had recently changed. The financial environment of the early 21st century looked more like the United States before the Depression than after: a country on the brink of a crash.

Why did the Federal Reserve put low interest rates on mortgages?

After the Federal Reserve System imposed low interest rates to avert a recession after the September 11, 2001 terrorist attacks, ordinary investments weren’t yielding much. So savers sought superior yields.

What was the financial environment like in the early 21st century?

The financial environment of the early 21st century looked more like the United States before the Depression than after: a country on the brink of a crash. pinterest-pin-it. An employee of Lehman Brothers Holdings Inc. carrying a box out of the company’s headquarters after it filed for bankruptcy.

What was the financial crisis of 2008?

The 2008 financial crisis had its origins in the housing market, for generations the symbolic cornerstone of American prosperity. Federal policy conspicuously supported the American dream of homeownership since at least the 1930s, when the U.S. government began to back the mortgage market. It went further after WWII, offering veterans cheap home loans through the G.I. Bill. Policymakers reasoned they could avoid a return to prewar slump conditions so long as the undeveloped lands around cities could fill up with new houses, and the new houses with new appliances, and the new driveways with new cars. All this new buying meant new jobs, and security for generations to come.

When did the mortgage market explode?

According to the Final Report of the National Commission on the Causes of the Financial and Economic Crisis of the United States, between 2001 and 2007, mortgage debt rose nearly as much as it had in the whole rest of the nation’s history. At about the same time, home prices doubled. Around the country, armies of mortgage salesmen hustled to get Americans to borrow more money for houses—or even just prospective houses. Many salesmen didn’t ask borrowers for proof of income, job or assets. Then the salesmen were gone, leaving behind a new debtor holding new keys and perhaps a faint suspicion that the deal was too good to be true.

Why did the stock market crash in 2008?

The stock market crashed in 2008 because too many had people had taken on loans they couldn’t afford. Lenders relaxed their strict lending standards to extend credit to people who were less than qualified. This drove up housing prices to levels that many could not otherwise afford.

Why did Fannie Mae offer unconventional mortgage terms?

Lenders who extended home loans to high-risk borrowers offered mortgages with unconventional terms to reflect the increased likelihood of default.

How did the bailout affect the Dow Jones?

Each bailout announcement affected the Dow Jones, sending it tumbling as markets responded to the financial instability. The Fed announced a bailout package, which temporarily bolstered investor confidence. The bank bailout bill made its way to Congress, where the Senate voted against it on September 29, 2008.

Why did the subprime mortgage market thrive?

While housing prices continued to increase, the rising subprime mortgage market thrived. Because house values rose so quickly, the increase in home equity offset the bad debt buildup. If a borrower defaulted, banks could foreclose without taking a loss on the sale.

What happened to the housing market in 2007?

A crisis was virtually inevtiable. Once the housing market slowed down in 2007, the housing bubble was ready to burst.

How did the relaxed lending standards affect the housing market?

The relaxed lending standards fueled the housing growth and corresponding rise in home values. People with bad credit and little-to-no savings were offered loans they could not afford. Meanwhile, banks were repackaging these mortgages and selling them to investors on the secondary market.

How to avoid emotions?

Avoid letting your emotions rule your actions. Stick to your investment plan and stay the course even if you are worried about your portfolio. As the stock market rebounds, so will your portfolio… but only if you leave it alone. Diversify your investments.

Why did the Dow Jones crash?

The major crash occurred due to the major fall of Dow Jones to 777.8 in single-day trading and the rejection of bank bail-out bill by the Congress. But the signs were visible from the time before the crash hit the market.

What was the Dow value in September 2008?

The day was ended at the Dow value of 11,388.44. On September 20, 2008, the bank bailout bill was sent to Congress by Secretary Paulson and Federal Reserve Chair. The Dow fell to 777.68 points during the intraday trading that increased panic in the Global Market.

How many points did the Dow drop in 2008?

By September 17, 2008, the Dow fell by 446.92 points. By the end of the week on September 19, 2008, the Fed established the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility that committed to offer loans to banks to buy Commerical paper from the money market funds.

How much did the Fed lose from Lehman Brothers?

By making $85 billion loans for 79.9% equity the Fed took ownership of the AIG. With the collapse of Lehman Brothers, there was a loss of $196 billion that increased the panic among many businesses. Bank has driven up the rates as they were afraid to lend money. By September 17, 2008, the Dow fell by 446.92 points.

What was the impact of the 2008 stock market crash?

There is no doubt behind the saying, that the crash pushed the banking system towards the edge of collapse.

Why did the stock market crash in 2008?

In all, the stock market crash 2008 as a result of a series of events that eventually led to the failure of some of the largest companies in the US.

How much GDP growth was there in 2007?

As per the study in 2007 by the BEA, the GDP growth estimation reveals that there was only 0.6% growth in the fourth quarter of 2007 with the loss of 17,000 jobs since 2004.

What happened in 2008?

By the fall of 2008, borrowers were defaulting on subprime mortgages in high numbers, causing turmoil in the financial markets, the collapse of the stock market, and the ensuing global Great Recession.

Why did the government take over Fannie Mae?

2007 peaks, the government announced its takeover of Fannie Mae and Freddie Mac as a result of losses from heavy exposure to the collapsing subprime mortgage market. 6 One week later, on Sept. 14, major investment firm Lehman Brothers succumbed to its own overexposure to the subprime mortgage market and announced the largest bankruptcy filing in U.S. history at that time. 7 The next day, markets plummeted and the Dow closed down 499 points at 10,917. 8

Why did Bear Stearns fail in 2007?

By March 2007, with the failure of Bear Stearns due to huge losses resulting from its underwriting many of the investment vehicles linked to the subprime mortgage market, it became evident that the entire subprime lending market was in trouble. Homeowners were defaulting at high rates as all of the creative variations of subprime mortgages were resetting to higher payments while home prices declined.

Why did the subprime mortgages have unconventional terms?

Since these borrowers were considered high-risk, their mortgages had unconventional terms that reflected that risk , such as higher interest rates and variable payments. While many saw great prosperity as the subprime market began to explode, others began to see red flags and potential danger for the economy.

How much credit did Fannie Mae and Freddie Mac extend in 2002?

As of 2002, government-sponsored mortgage lenders Fannie Mae and Freddie Mac had extended more than $3 trillion worth of mortgage credit. In his 2002 book Conquer the Crash, Prechter stated, "confidence is the only thing holding up this giant house of cards.". 2 ?.

What is the term for mortgage backed securities?

Financial firms sold these subprime loans to large commercial investors in pools of mortgages known as mortgage-backed securities (MBS).

What is a subprime borrowers mortgage?

These borrowers were called "subprime borrowers" and were allowed to take out adjustable-rate mortgages, which would start out with low monthly payments that would become much larger after a few years.

The origin of it all

The origin of the crisis wasn’t in 2008 or 2007. It was in 2001. Following the tragic 9/11, the USA fell into recession. There was widespread pain and consumption was at miserable levels. To boost up the economy, the Federal Reserve (Fed) lowered interest rates.

What happened next

Bankers saw this opportunity and got to work. They securitized mortgages and also came up with mortgage-backed securities (MBS). They were a form of asset-backed securities and every MBS had a collection of diverse mortgages to diversify risk.

A rush for investments

This investment cycle did start well. The banks had found a way to make big money through CDOs as there was a frantic rush towards buying houses and hence there was a huge rise in the number of investors wanting to invest in CDOs. Since it was backed by a safe asset like a house, the investors felt it was a high reward low-risk investment.

Housing bubble about to burst

Things started going downhill when almost all creditworthy borrowers had taken a house. Driven by this problem and their greed, banks now started lending to borrowers with higher chances of defaulting.

Housing bubble of 2008 finally bursts

And then the inevitable happened. The sub-prime borrowers started defaulting. The banks didn’t panic initially. As planned, they sold the houses of the defaulters. This is where the unplanned mess occurred. There were too many defaulters. A lot more than the banks anticipated. And hence there were a bit too many houses on the market now.

Global economic ripple effects

The housing market crash led to the stock market crash not only in the US which spilled over to other countries as well. The financial system of the world had come apart. There was debt all around, investments were worthless and investment banks were clueless. Almost all major economies around the globe entered a recession by the end of 2008.

Greatest financial crisis in modern era

The bottom line is that the intention behind low-interest rates and even securitizing mortgaging was a good one. But the onset of greed in the banks which led to unchecked lending brought the world to its knees. There is a very fine line in finance between a game-changing move and self-destruction.

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