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After decades of trying to push the U.S. government out of banking, it turned out that in the end, the U.S. government was the only institution the bankers trusted. They knew only that the rating agencies said it was as safe as houses always had been, at least since the Depression. At about the same time, home prices doubled.
The two other years in which the Dow did worse than that were 1907, when the index lost 37.7%, and 1931, when the Dow lost 52.7%.Might there be a silver lining in these historical statistics? Congress gave them one way to do so in 2000, with the Commodity Futures Modernization Act, deregulating over-the-counter derivatives—securities that were essentially bets that two parties could privately make on the future price of an asset.
In 1932, the Dow lost an additional 23.1%.Two data points aren't conclusive, to be sure. Does the stock market tend to bounce back after losses as big as 2008's?That, at least, is the conclusion I reached after feeding the Dow's yearly returns into my PC's statistical package. Their preferred shelter: the U.S. treasury, into whose bonds and bills the terrified financiers of the world poured what liquid wealth they had left. The stock market and housing crash of 2008 had its origins in the unprecedented growth of the subprime mortgage market beginning in 1999.
The money market, some $3.5 trillion in size, provided vital short-term financing to U.S. corporations—but now it joined banks, mortgage lenders, and insurance firms among the faithless giants of the financial system that had suddenly proven spectacularly unworthy of confidence.
By the weekend of September 13-14, 2008, Lehman was clearly finished, with perhaps tens of billions of dollars in overvalued assets on its balance sheets. Banks were heavily invested in stocks, and individual investors borrowed on margin to invest in stocks. First, they insured commercial banks and the savers they served through the Federal Deposit Insurance Corporation (FDIC). If the stock market loses as much value as at did from the October 2007 peak to the March 2009 market low, over 50% of peak valuation will disappear. Shares in RMC's money-market fund were now worth less than a dollar apiece—in the language of finance, RMC had "broken the buck," something no money-market fund had done to individual investors before. In afternoon trading the Dow Jones Industrial Average fell over 500 points as U.S. stocks suffered a steep loss after news of the financial firm Lehman Brothers Holdings Inc. filing for Chapter 11 bankruptcy protection.
An employee of Lehman Brothers Holdings Inc. carrying a box out of the company's headquarters after it filed for bankruptcy.To prevent the Great Depression from ever happening again, the U.S. government subjected banks to stringent regulation. But on other occasions it continues to go down.Consider 1908 -- the year after the Dow lost 37.7% -- when it gained 46.6%.But before you get too excited, consider how the Dow did in 1932, the year following its 53.7% loss in 1931.
Although not required by law to bail out Bear, Fannie or Freddie, they did so to avoid disaster—only to be castigated by fellow Republican believers in deregulation. One such institution was the Reserve Management Corporation, which in September re-valued its Lehman securities at zero and then had to announce it could no longer afford to redeem shares in its money-market fund at par value. To meet this demand for higher returns, the U.S. financial sector developed securities backed by mortgage payments. The Buffett indicator shows this bear market is just getting started. Months passed as Fuld failed to find a buyer for his firm.
Over several decades, policymakers eroded Glass-Steagall separations. And financiers regarded them as reliable, pointing to data and trends dating back decades. The 2008 Crash: What Happened to ... pay depositors 3 percent, charge borrowers 6 percent, and hit the golf course by 3 p.m. ... What Caused the Stock Market Crash of 1929? So savers sought superior yields. 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.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. U.S. … 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. But with a crisis upon them, Bush and his lieutenants, particularly Treasury Secretary Paulson and Federal Reserve Chair Ben Bernanke, decided not to bet on leaving the markets unfettered. On September 4, 1929, the stock market hit an all-time high. 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.
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 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. The secretary of the treasury, Hank Paulson, had—reporters said—"concluded that the financial system could survive the And because that system had become a globally interdependent one, the U.S. financial crisis precipitated a worldwide economic collapse.
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