Knowledge — 6 months ago

Big 2008 Market Crash: Overview!

by Rob V.

2008 Market Crash, Market Crash 2008, Crash 2008

2008 Market Crash Overview: What Happened in 2008 Crash

The stock market crash occurred on September 29, 2008. The mortgage crisis, Credit crisis, Bank collapse, Government bailout were terms used in the headlines throughout 2008 when major financial markets lost more than 30% of their value. The Dow Jones Industrial Average fell by777.68 points in intra-trading. The stock market crashed and descended because the Congress rejected the bank bailout bill. There were, however, other causes that had built up over time. This period signifies one of the most dreadful time for the US financial market history.

1. Subprime mortgage crisis

In 1999, The Federal National Mortgage Association(Fannie Mae) began a collaborative effort to make home loans more accessible by providing loans to people who had a lower credit score and savings. The reason being, they wanted everyone to achieve the American Dream of owning their own homes. From then on, Fannie Mae began to prosper. Borrowers had positive equity even if they had a low mortgage payment because their homes had increased in value and could be used as collateral to repay the debt. It created a risk for the mortgage market and highly increased the chances of consumer debt.

- The rise in Mortgage-Related Investments

Mortgage-backed securities market were on the rise. It pooled in mortgages into a single security and investors benefitted from the premiums and interest payments on the individual mortgage. It was highly profitable as house prices continued to increase. However, The housing prices began to decrease from 2005 and homeowners began to default on their mortgage in large numbers.

- Market decline

As homeowners were defaulting on their loans at high rates, the subprime mortgages started resetting their rates to higher payments while the house prices declined. It led to homeowners forced to lose their home to foreclosure and ultimately, bankruptcy. It caused the financial market to plummet by 2007.

2. Subsequent effects

By 2008 January, the GDP growth estimate was down. Growth was only 0.6% according to the revised BEA. The economy had lost 17,000 jobs. In July 2008, Fannie Mae and Freddie Mac needed a government bailout. Two months later, Lehman Brothers, succumbed to its overexposure to the subprime mortgage and declared the largest bankruptcy filing in the US. It caused the net asset value of the Reserve Primary Fund to fall below $1 per share. As the year went on there were more crashes to follow.

- The Fed announced that it was bailing out American International Group Inc.

- Money market funds lost $144 billion and most business parks lost their cash overnight. Bank rates increased as panic was all around.

- Money market funds lost $144 billion and most business parks lost their cash overnight. Bank rates increased as panic was all around.

-  The Federal Reserve chair, Ben Bernanke sent a bank bailout bill to the Congress and received a rejection. It caused the Dow to fall by 777.68 points. Global markets began to panic.

- Gold increased to $900 an ounce, MSCI World Index dropped 6% in one day and Oil prices dropped to $95 a barrel.

- Goldman Sacha and Morgan Stanley the last two standing investment banks converted to bank holding companies to obtain bailout funding if need be.

- In November 2008, the Labour Department reported that the economy had lost 240,000 jobs in October. The Treasury announced that it was using a part of the $700 billion bailouts to buy preferred stocks in the nations banks.

In January 2009, the investors believed that the new Obama administration could deal with the recession with his economic advisors. His stimulus plan instilled confidence in investors and calmed the investors down.

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