Global Financial Crisis Peaks

Setting the scene

By 2008, the U.S. housing bubble, fueled by subprime mortgages and securitization, was collapsing. Banks had packaged risky mortgages into mortgage-backed securities (MBS) and collateralized debt obligations (CDO), rated AAA by agencies despite their risk. When housing prices fell and defaults rose in 2007, the value of these securities plummeted. Banks were highly leveraged, holding these toxic assets. The crisis began in earnest in March 2008 when Bear Stearns collapsed and was sold to JPMorgan with Fed assistance.

What happened

The crisis peaked on September 15, 2008, when Lehman Brothers, the fourth-largest U.S. investment bank with $600 billion in assets, filed for bankruptcy—the largest in U.S. history. The government had rescued Bear Stearns and Fannie Mae/Freddie Mac, but let Lehman fail, fearing moral hazard. Markets panicked. The next day, the Fed bailed out AIG with $85 billion. On September 29, the Dow fell 778 points after Congress initially rejected the $700 billion TARP bailout. Credit markets froze—banks stopped lending to each other. The crisis spread globally, with banks in Europe and elsewhere facing collapse.

Why it still matters

The Global Financial Crisis caused the Great Recession, the worst downturn since the Depression. U.S. unemployment peaked at 10% in 2009, and 8.7 million jobs were lost. The crisis led to Dodd-Frank financial reform in 2010, increased bank capital requirements, and the creation of the Consumer Financial Protection Bureau. It also fueled populism and distrust of elites, contributing to Brexit and Trump's election. Central banks used unprecedented quantitative easing, expanding balance sheets by trillions. The crisis demonstrated the dangers of financial deregulation, complexity, and interconnectedness, and that 'too big to fail' banks could hold economies hostage. It fundamentally changed how governments view financial regulation.

Background

Governments and central banks launched extraordinary interventions.