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The US stock market peaked in October 2007, when the Dow Jones Industrial Average index
exceeded 14,000 points. It then entered a pronounced decline, which accelerated
markedly in October 2008. By March 2009, the Dow Jones average had reached a
trough of around 6,600. 4 years later, it hit an all-time high and was
probable, but debated, that the Federal Reserve’s aggressive policy of quantitative easing spurred
the partial recovery in the stock market.

Market strategist Phil Dow said that the Dow Jones average’s fall of
more than 50% over a period of 17 months is similar to a 54.7% fall in the
Great Depression, followed by a total drop of 89% over the following 16 months.
In March 2009  the decline was not
relatively large like the great depression although the decline amounts were
nearly the same at the time, but the rates of decline had started much faster
in 2007.

The first
notable event signalling a possible financial crisis occurred in the United
Kingdom on August 9, 2007, when BNP Paribas, citing “a complete evaporation of
liquidity”, blocked withdrawals from three hedge funds. The significance
of this event was not immediately recognized but soon led to a panic as
investors and savers attempted to liquidate assets deposited in highly
leveraged financial institutions.

The IMF estimated that large banks of USA and Europe lost around
$1 trillion on dangerous assets and from loans from 2007 to  2009. These losses are expected around
$2.8 trillion from 2007 to 2010. One of the first victims was Northern Rock, a British bank and due to its highly leveraged nature of business led the bank to request
security from the Bank of England, which in
turn led to investor panic in mid-September 2007.

Investors
began to worry less about a recession and more about inflation, as the price of
oil continued to rise (hitting almost $144 per barrel in July). At the
beginning of 2008, the stock market had fallen almost 15% from its peak in the
fall of 2007. Then, in May 2008, the Dow Jones climbed to13,058, within 8% of
the record 14,164 set in October 2007. To the surprise of both borrowers and
regulators, high-quality collateral was not enough to ensure access to the repo
market. Repo lenders cared just as much about the financial health of the
borrower as about the quality of the collateral. In fact, even

for the
same collateral, repo lenders demanded different haircuts from different
borrowers. Despite the bankruptcy provisions in the 2005 act, lenders were
reluctant to risk the hassle of seizing collateral, from a bankrupt borrower.

 

Some large
investment banks, bank holding companies, and insurance companies, including
Bear Stearns, Merrill Lynch, Citigroup, and AIG, experienced massive losses
related to the subprime mortgage market because of significant failures of
corporate governance, including risk management and by its exposure to risky
mortgage assets, its reliance

on short-term funding, and its high
leverage.

 

 

Post Author: admin