How did the credit crunch at the end of 2007 become a full financial meltdown by the middle of 2008, and finally turn into a global recession?
This interactive timeline highlights key dates in the financial collapse and helps you find the original reports of the events as they happened.
Click on an event on the timeline here: http://news.bbc.co.uk/2/hi/business/8242825.stm
8 February 2007: HSBC WARNS OF SUBPRIME LOSSES
HSBC reveals huge losses at its US mortgage arm Household Finance due to subprime losses, in one of the first signs that the US housing market is turning sour, and that it could have a knock-on effect on the global financial sector.
2 April 2007: NEW CENTURY GOES BUST
New Century Financial, a leading subprime lender, files for bankruptcy. It is the first signal that something is seriously amiss at US mortgage lenders. Shares in other US mortgages banks like Countrywide come under pressure.
9 August 2007: CREDIT MARKETS FREEZE
Credit markets go into freefall after Paribas announces that two of its hedge funds are frozen due to "complete evaporation of liquidity" in asset backed security market. European Central Bank injects 170bn euros into the banking market and Fed lowers interest rates. Bank of England refuses to intervene in credit markets.
14 September 2007: RUN ON THE ROCK
Savers in beleaguered UK former building society Northern Rock begin withdrawing their savings after the BBC reveals the bank has received emergency financial support from the Bank of England. Northern Rock is in trouble as it was heavily reliant on the wholesale money market to fund its operations, and these markets have dried up.
17 March 2008: BEAR STEARNS RESCUE
US investment bank Bear Stearns is rescued by rival bank JP Morgan Chase after the US government provides a $30bn guarantee against its mounting losses. It is the first sign that, rather than easing, the financial crisis is getting worse but investors are relieved that US government prepared to act as lender of last resort.
7 September 2008: FANNIE MAE RESCUE
US government rescues giant mortgage lenders Fannie Mae and Freddie Mac, taking them into temporary public ownership after they reveal huge losses on the US subprime mortgage market. Their failure would have triggered a run on the dollar as many foreign governments had invested in their bonds, believing they were already guaranteed by the government.
15 September 2008: LEHMAN BROTHERS GOES BANKRUPT
US investment bank Lehman Brothers goes bankrupt after the US government refuses to bail it out. Merrill Lynch is bought by Bank of America after revealing it also is facing huge losses. Insurance firm AIG, which issued credit guarantees for subprime mortgages, is rescued the next day with an $85bn loan from US Treasury.
17 September 2008: LLOYDS TAKES OVER HBOS
Lloyds agrees a £12.2bn takeover of the ailing Halifax Bank of Scotland (HBOS), the UK's largest mortgage lender, after its shares plummet amid concerns over the firm's future. The UK government invokes a national interest clause to bypass competition law, as the new bank is responsible for close to one-third of the UK's savings and mortgage market.
3 October 2008: $700BN BAILOUT APPROVED BY CONGRESS
The biggest financial rescue in US history is approved after a gruelling debate in Congress, and initial defeat a week earlier. Republicans and Democrats alike were reluctant to bail out the banks with such large sums while ordinary citizens were suffering in the recession. Both presidential candidates endorse the bail-out.
13 October 2008: UK GOVERNMENT RESCUES RBS AND LLOYDS-HBOS
Two of the UK's major banks, RBS and HBOS, are in major trouble as financial markets collapse. Having merged with HBOS in September, Lloyds is hit by the huge debts built up by its new partner in the mortgage market, while RBS is struggling with its expensive merger with ABN-AMRO. The UK government injects £37bn to stabilise both banks.
16 December 2008: FED CUTS KEY RATE TO NEAR ZERO
The US central bank cuts its interest rate to 0 - 0.25% in an attempt to stem the deepening recession, and begins to consider a programme of quantitative easing to throw money into the economy to help make borrowing easier. It is the lowest interest in the history of the Fed.
14 February 2009: US CONGRESS PASSES $787BN STIMULUS
President Obama wins his first major victory in Congress as it passes a huge economic recovery plan aimed at preventing the US falling into recession as a result of the credit crunch. Much of the money will go to the states to prevent them laying off public sector workers, but some will be invested in infrastructure projects like roads, schools and green energy.
2 April 2009: G20 SUMMIT IN LONDON
World leaders pledge an additional $1.1 trillion to help emerging market countries and promise coordinated action to fight the slump and improve regulation. Gordon Brown emerges triumphant from a global summit, which he claims is a turning point in the crisis, and stock markets begin to revive. However, not all the money pledged is actually delivered.
22 April 2009: UK BUDGET REVEALS HUGE DEFICIT
The UK Chancellor Alistair Darling reveals that the credit crunch will lead to the largest budget deficit in UK financial history of £175bn, with total government debt set to double to £1 trillion by 2014. Mr Darling admits it will take two Parliaments, or 10 years to get the budget back to the position it was in before the credit crunch.
Well, what did you do with your portfolio of stocks during each of the above periods?
Lessons drawn from this crisis:
1. The recession was rather a long one. The start was when HSBC first announced the problems with US subprime loans in February 2007. However, the severity of the crisis was uncertain in the beginning. Our local Tan Teng Boo dismissed the subprime as of insignificant size to dent the financial market. However, he failed to predict the subsequent events. Those who took his advice endured the pain of the forthcoming severe downturn.
2. The crisis was better explained by reading financial articles of the US, UK, Australia and other countries. Those reading the local press were unlikely to get the whole big picture of the financial problems that subsequently unfolded. Reading widely gave a more balanced views. However, faced with uncertainties, there were conflicting views given by many "experts".
3. The local gneral election of March 08 did not affect the local market much despite the BN losing 5 states. Presumably, the economic and political risks were already factored in the index then.
4. The Lehman crisis brought a precipitous fall in the market. Those who panicked and sold after the fall would have fallen to the folly of the market - buying high and selling low - being driven by fear in a falling market. The better approach then would be to do nothing. So many a time, so much losses came about because one has to do something, when one would have been better to just do nothing. The braver and smarter ones actually bought into the market, though on hindsight, this was still 6 months too early.
5. It is difficult to time the market. It is better to be approximately right than to be exactly wrong. Warren Buffett was right when he asked people to buy in October 2008. To do likewise, one has to be wired appropriately - this is certainly possible through a deeper understanding of the market, the stocks and behavioural finance.
6. Buy and hold is a safe strategy for selected stocks.
7. The market is cyclical. After a downturn of 20% or more, the ghost of the 1929 prolonged Great Recession was resurrected causing fear to investors. This occured also in previous downturns. Just as the market cannot rise forever relentless, similarly, it cannot fall forever unabated. After a severe prolonged downturn, try to call the near-bottom if you can to pick up the underpriced valued stocks. Similarly, in a prolonged bull market, try to call the near-top to cash out of some of the overpriced stocks.
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