Timeline of the Global Financial Crisis
This is a compilation from a number of different news sources.
PRELUDE – Where to Start?
1980: Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in 1980. Preempted state interest rate caps which made high interest sub prime mortgages legal.
1982: The Alternative Mortgage Transaction Parity Act (AMTPA) permitted the use of variable interest rates and balloon payments.
1986: Salomon Brothers and First Boston create the first collateralized debt obligations (CDOs), tradeable securities combining debt pooled from bonds, loans, mortgage-backed securities, and other assets.
1986: Tax Reform Act removes deductions for interest paid except for mortgage interest, paving the route to tying more and more consumer lending to mortgages.
1992: Congress passes the Federal Housing Enterprises Financial Safety and Soundness Act, which requires government-sponsored enterprises Fannie Mae and Freddie Mac to devote a percentage of their lending to affordable housing. This leads to an increase in the overall number of loans being pooled and securitized.
1994: J.P. Morgan introduces the first credit default swap (CDS)
1995: SubPrime Mortgage Lending $65 Billion. 30% of Loans securitized. Per Inside B&C Lending
1999:In November, the Gramm-Leach-Bliley Financial Services Modernization Act partially repeals the Glass-Steagall Act of 1933, allowing banks to operate other financial businesses such as insurance and investment brokerages.
2000: Commodity Futures Modernization Act in a rider attached to an 11,000-page appropriations bill hours before Congress planned to leave for Christmas recess; Page 262 defines interest rates, currency prices, and stock indexes as “excluded commodities,” allowing trade of derivatives to be outside of state bucket shop regulations dating back to 1907 financial crisis that prohibit secondary trading in securities where there is no underlying interest.
2001: Banking regulators issue guidance on definition of Sub Prime Mortgages as well as capital requirements. Stress testing is required:
An institution’s capital adequacy analysis should include stress testing as a tool for estimating unexpected losses in its subprime lending pools. Institutions should project the performance of their subprime loan pools under conservative “stress test” scenarios, including an estimation of the portfolio’s susceptibility to deteriorating economic, market, and business conditions. Portfolio stress testing should include “shock” testing of basic assumptions such as delinquency rates, loss rates, and recovery rates on collateral. It should also consider other potentially adverse scenarios, such as: changing attrition or prepayment rates; changing utilization rates for revolving products; changes in credit score distribution; and changes in the capital markets demand for whole loans, or asset-backed securities supported by subprime loans.
2002: The Mortgage Bankers Association of America (MBAA) reports that subprime loans in the third quarter of 2002 had a delinquency rate 51/2 times higher than that for prime loans (14.28 versus 2.54 percent) and the rate at which foreclosures were begun for subprime loans was more than 10 times that for prime loans (2.08 versus 0.20 percent).
2003: Sub Prime mortgage origination becomes highly concentrated 2000 – 2003 with 93% market share for largest 25 firms by 2003.
June 2003: Federal Reserve Chair Alan Greenspan lowers federal reserve’s key interest rate to 1%, the lowest in 45 years.
2003: Sub Prime Lending reported to grow to $332 B by Inside B&C Lending. 60% of loans securitized vs. 75% for conventional mortgages.
2004-2005: Arizona, California, Florida, Hawaii, and Nevada record price increases in excess of 25% per year.
2004: U.S. homeownership rate peaks with an all time high of 69.2 percent. Following example of Countrywide Financial, the largest U.S. mortgage lender, many lenders adopt automated loan approvals Mortgage fraud by borrowers increases.
October:SEC effectively suspends net capital rule for five firms—Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns and Morgan Stanley. Freed from government imposed limits on the debt they can assume, they levered up 20, 30 and even 40 to 1, buying massive amounts of mortgage-backed securities and other risky investments
2005: Booming housing market halts abruptly in many parts of the U.S. in late summer.
August 2005: Energy Policy Act signed into law. Encouraged bio fuel development in the US. Eventually as much as 23% of US corn crop went to ethanol. Diesel fuel demand (to plant, harvest and ship ethanol) drove midwest diesel prices up much fasted than gasoline. Diversion of crops to fuel created food price spike along with energy price spike, driving down free cash to pay for housing.
Fall 2005: Hurricanes Katrina, Rita, Wilma hit the Gulf Coast. Katrina total loss of $120 B, insured losses of half that. Disruption to Gulf Oil production fed major price spike for energy.
December 2005 through June 2006: Federal Reserve raises interest rates five times by 25 bps each.
2006: Prices are flat, home sales fall, resulting in inventory buildup. U.S. Home Construction Index is down over 40% as of mid-August 2006 compared to a year earlier.
May 5: In possibly the first casualty of the looming subprime crisis, Kirkland, Washington based Merit Financial Inc. files for bankruptcy and closes its doors, firing all but 80 of its 410 employees, kept to wind down the business. Chief financial officer, Ryan Kidd, said that Merit’s marketplace had declined about 40% and sales were not bringing in enough revenue to support the overhead of running the company.
August: 37% of all loans sold in the United States are originated without income being proven. In areas where homes are the least affordable (i.e. California, and Florida) that number grows to over 50%. Some banks doing business nationwide are reporting that close to 80% of loans originated are stated income loans. Reported by Mortgage Brokers Association for Responsible Lending.
Link to 2007 Timeline
Link to 2008 Timeline
Link to 2009 Timeline
Link to Commentary on the Timeline
Link to Timeline of the Euro Crisis