September was a historic month in the financial markets. What started a year earlier as the subprime mortgage collapse had morphed into the perfect financial storm that wiped out some of the biggest financial firms on Wall Street. There was a general and genuine concern that the financial system was coming apart and could virtually shut down.
First, the Feds took over Fannie Mae and Freddie Mac, two government-sponsored mortgage giants that own or guarantee about five trillion dollars in home loans, or nearly half of the total US mortgage market.
Then Lehman Brothers, a prominent securities firm founded in 1850, filed for bankruptcy.
Bank of America, which earlier this year acquired Countrywide, acquired Merrill Lynch, another prominent financial firm.
The Feds were then forced to bail out insurance giant American International Group (AIG), the largest insurance company in America, which needed some $70 billion just to stay afloat.
By the end of the month, JP Morgan Chase, which bought out Bears Sterns in June, would also acquire Washington Mutual and, in a similar move, Citigroup would acquire Wachovia.
In the end, amidst the worst September in the financial markets since 2001, each of these prominent companies had failed to secure investor confidence as liquidity concerns forced their stock prices to levels that ultimately led to their demise, despite a major effort by the government and other central banks around the world to offer unprecedented financial support.
Throughout the month of September, the Federal Reserve not only injected billions into the financial market, the US Treasury was forced to guarantee nearly $2 trillion in money market mutual fund assets. The European Central Bank, Swiss National Bank, and Bank of England also pitched in a combined $90 billion in cash infusions.
Banks and Wall Street firms had essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans, and other consumer borrowing.
To avoid further downward pressure on stock prices, the Securities and Exchange Commission banned naked short-selling and temporarily banned short-selling 799 financial companies for 10 days. Fannie Mae and Freddie Mac increased their purchases of illiquid assets, including mortgage-backed securities, that have been clogging up our financial system and further tightening the availability of credit.
Finally, to avoid an all-out credit freeze, a plan to create legislation for an unprecedented bailout of our financial system was put in place by representatives from the Federal Reserve, the US Treasury, the Bush Administration, Congress, and even the Presidential candidates - a controversial $700 billion plan that, had it passed, would have cost tax-payers for years to come.
The plan, however, came up 13 votes short of the 218 votes necessary for passage. The House vote shocked financial markets, which expected the house to approve the plan - a decision that sent the Dow Jones industrial average down more than 700 points, the largest intra-day drop in history.
At the time of the writing of this blog, a new plan has already been announced in the Senate and passed last Friday.
What do you think about the decisions of the government to bail out these Corporations?
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