THE NAME GAME: Financial Crisis Timeline 2007 By summer 07 the housing market is in trouble -- prices falling, inventories and foreclosures rising. June - Two Bear Stearns hedge funds are forced into bankruptcy -- they had invested in AAA-rated mortgage-backed securities whose value had plummeted. August - The TED spread shoots up and stays high, indicating an unprecedented level of fear in the global economy. 2008 March 10- Bear Stearns stock starts falling around 11 a.m. on Monday on rumors the company may be running out of cash. By afternoon the stock -- which traded as high as $171 per share in 2007 -- hovers around $60. In mid-afternoon, Bear -- which has nearly $18 billion in cash reserves at the time -- decides to put former CEO and current board member Alan Ace Greenberg on CNBC to reassure the market. Greenberg says the rumors are ridiculous. March 11 - Some hedge funds pull money amid swelling rumors of liquidity problems. The rumors are also fueled by a flurry of novation requests, in which Bears trading partners ask a third party to purchase their contracts with Bear for a fee. Inside Bear, Ace Greenberg tries to keep up spirits. According to The Wall Street Journal, Greenberg performed magic tricks and at the request of his colleagues, he also reprised a scene from company lore: He practiced a golf swing on the trading floor, just as he had on Black Monday 1987, when world markets crashed. Mr. Greenberg, who doesnt play the game, had famously pretended to swing a club and loudly announced he was taking the next day off. March 12 - After internal debate, a decision is made to offer an interview with Bear CEO Alan Schwartz to CNBCs David Faber. Right up front, Faber raises the specter that Goldman Sachs, Bears most important client, might be beginning to desert the firm. On Wed. afternoon, some repo lenders start to suggest they might not renew Bears loans the next morning. That night, Bears senior management and advisers huddle to discuss their strategic options. March 13 - Despite the falling stock price, Schwartz tells his executives at lunch, This is a whole lot of noise. By end of day, Bears cash reserves are down to $3.5 billion. That night, JPMorgan CEO Jamie Dimon is celebrating his birthday at a family dinner when his cell phone rings. Its Schwartz asking for an infusion of up to $30 billion, or for JPMorgan to buy Bear outright. Dimon tells Schwartz to ask the Fed or Treasury Department for help, but sends over a team to start examining Bears books. Geithner also sends a Fed team over. March 14 - After examining its books, JPMorgan and the Fed realize the extent of Bears toxic assets, including subprime mortgages and credit default swaps, and its frightening interconnectedness with other banks. At 4 a.m. Geithner calls his boss, Fed chief Ben Bernanke. Prohibited from lending directly to Bear, Fed officials workout a plan to loan money to JPMorgan, which, in turn, will provide funding as necessary to Bear for 28 days. Bear executives are relieved to have a month to resolve their problems. But the company is hammered again in the market and on his way home, Schwartz gets a call from Paulson and Geithner, telling him they want a deal in place by the time Asian markets open Sun. night. March 15 - On Saturday morning, hundreds of lawyers and accountants from Bears competitors begin examining its books. As the weekend progresses, the bidders drop out. Late on Saturday, JPMorgan executives warn that they are likely to bid $8-12 per share for the firm, whose stock closed at$32 per share on Friday. March 16 - Spooked by Bears books -- as well as a New York Times article that morning that asked Why save Bear Stearns?, --JPMorgan executives have second thoughts. They abruptly withdraw the offerSunday morning. With the Asian markets set to open at 6 p.m. EST, Bernanke pushes back and the Fed agrees to sweeten the deal with $30 billion to guarantee Bears toxic loans. JPMorgan is prepared to offer $4 per share for Bear, but worried about moral hazard, Treasury Secretary Henry Paulson insists JPMorgan drive down the price to $2 per share. Bear board members are outraged but realize they have no other options and approve the deal. March 24 - In order to get the deal through the Bear shareholder vote, JPMorgan raises the purchase price from $2 to $10 per share. July 2 - In a London speech, Treasury Secretary Henry Paulson outlines key challenges to U.S. and global capital markets and calls for improvements in regulatory structures. He warns: For market discipline to be effective, it is imperative that market participants not have the expectation that lending from the Fed, or any other government support, is readily available. ... For market discipline to constrain risk effectively, financial institutions must be allowed to fail. July 13 - The worlds largest mortgage lenders are hammered by losses related to the housing crisis. In mid-July, their stocks fall more than 60 percent. Testifying before Congress, Treasury Secretary Paulson asks for authority to take them over, but he hopes never to have to use it: If youve got a bazooka and people know youve got it, you may not have to take it out, he explains. Sept 7 - On Friday Sept. 5, the heads of Fannie and Freddie are called into separate meetings with Secretary Paulson and James Lockhart, director of the Federal Housing Finance Agency, the companies chief regulator. They are told the government is taking 80 percent ownership in each and giving them access to up to $200 billion in capital. Both executives will be replaced. Sept 9 - The fall is triggered by reports Lehman Brothers -- which had made billions in the now-toxic, high-risk real estate market -- couldnt secure extra financing from a Korean bank. It had already tried to make deals with Warren Buffett, Barclays, Bank of America, Morgan Stanley, HSBC and sovereign wealth funds from the Middle East and China -- with no success. Adding to Lehmans woes: Five days earlier, JPMorgan, the bank handling most of its trades, had asked for $5 billion in liquid assets as collateral to cover clients lending positions. Sept 10 - To assuage the market, Lehman holds an analyst/investor conference call to announce its $3.9 billion third-quarter loss a week early. It unveils a new restructuring plan. But executives dont mention a need for more capital, despite internal calculations that the firm will need an additional $3-5 billion by early 2009. (Prosecutors later open up an investigation on whether Lehman misled investors on this call.) Sept 11 - Lehmans computerized trading system freezes when JPMorgan demands another $5 billion in collateral on short notice. Rising numbers of hedge funds and other customers continue pulling their business from Lehman. Sept 12-14 - Friday night, after markets close, Paulson and Bernanke summon the heads of Wall Streets largest firms to the Federal Reserve Bank in New York. Concerned about moral hazard, Paulson makes clear there will be no bailout for Lehman. Fed officials insist they dont have authority for a rescue because the bank doesnt have enough collateral. Geithner says somebody needs to buy Lehman. Competitors examine Lehmans books and Bank of America and Barclays emerge as the main suitors. But Bank of America decides to buy brokerage firm Merrill Lynch instead; Barclays drops out on Sunday. Lehman is forced to file for bankruptcy protection. Sept 16 - After Lehman goes under, the stock market nose dives and global credit markets freeze. Shares of the Primary Reserve Fund -- a conservative money market fund widely viewed as being nearly as safe as cash -- fall below $1. The fund holds nearly $800 million in commercial paper -- a form of short-term debt -- issued by Lehman. Hedge funds that used Lehmans London office to trade have billions of dollars frozen in Lehmans bankruptcy. The LIBOR rate, which reflects the rate at which banks are willing to loan to each other, shoots up overnight from 3.11 percent to 6.44 percent -- the largest spike ever. But banks still are unwilling to loan to each other. Shares of the worlds largest insurance company fall 61 percent because AIG had poured billions into unregulated credit default swaps-- insurance policies on companies like Lehman -- betting theyd never go bankrupt. AIG needs cash, but credit markets are frozen. The Fed agrees to a two-year $85 billion loan; the government takes an 80 percent ownership stake in AIG. Sept 18 - On Wed., the Dow closes down 449. But thats not the worst of it: The credit markets have nearly frozen up. Investors are moving money from stocks, bonds and money market funds to Treasury bills, seen as the safest investments in the world. Wed. night, Bernanke calls Paulson and tells him its time to start thinking about a full-scale bailout of the nations entire financial system. We cant keep doing this, he says, Both because we at the Fed dont have the necessary resources and for reasons of democratic legitimacy, its important that the Congress come in and take control of the situation. Sept 18 - Paulson and Bernanke go to Congress to present a rescue plan to congressional leadership. If we dont do this, we may not have an economy on Monday, warns Bernanke. Sept 20 - The emergency plan asks for $700 billion to buy up toxic mortgage securities from the banks, and does not allow for an oversight mechanism from Congress or the courts. The congressional reaction --particularly from conservative Republicans -- is full revolt. Sept 21 - Wall Streets last two investment banks -- GoldmanSachs and Morgan Stanley -- announce theyre turning themselves into bank holding companies, regulated by the Federal Reserve. Sept 25 - On the day Washington Mutual becomes the largest bank failure ever, congressional leaders, President Bush and the two presidential candidates meet at the White House on the proposed bailout plan. Sept 29 - In addition to many Republicans, 95 Democrats vote against the bailout measure. The Dow plunges 778 points -- the greatest single-day point loss ever. Paulson would later tell The New York Times, I never felt worse than when the House voted no. In the wake of the bills failure there is a debate over whether purchasing the banks toxic mortgage assets is really the way to go or whether the plan should focus on injecting capital directly into the banks. Oct 3 - The bill gives the Treasury secretary broad authority to purchase $700 billion in mortgage assets from the banks. But six lines of text buried deep within the bill authorize Treasury to provide capital injections. Soon after the bills passage, Paulson abandons the idea of buying the toxic assets. Oct 13 - Paulson calls the CEOs of the nations nine largest banks to his office -- Jamie Dimon (JPMorgan), Robert Kelly (Bank of New York/Mellon), John Thain (Merrill Lynch), Ronald Logue (State Street), John Mack (Morgan Stanley), Lloyd Blankenfein (Goldman Sachs), Ken Lewis (Bank of America), Vikram Pandit (Citigroup) and Richard Kovacevich (Wells Fargo). He tells them they each must accept billions in direct cash infusions. DO ANY OF THE NAMES ABOVE LOOK LIKE ANY OF THE NAMES BELOW? Partners in private-equity firms like Romney’s Bain Capital don’t risk their own money. They invest other people’s money and take 2 percent of it as their annual fee for managing the money regardless of how successful they are. They then pocket 20 percent of any upside gains. Partners like Romney pay taxes on only 13-15% of what they make— a lower rate than that paid by many middle-class Americans (you, your friends, me) — because of a loophole that treats this income as capital gains. The ostensible reason capital gains are taxed at a much lower rate than ordinary income is to reward investors for risking their money, but private-equity managers don’t risk a dime. In fact, rather than taking any real risks, they get government to subsidize them. Having piled the companies they purchase with debt, private-equity managers then typically issue “special dividends” that repay the original investors. Interest payments on that mountain of debt are tax deductible. In effect, government subsidizes them for using debt instead of incurring any real risk with equity. If the companies are subsequently forced into bankruptcy because they can’t manage payments on all this debt, they dump their pension obligations on the Pension Benefit Guaranty Corporation (PBGC), a federal agency, which picks up the tab. If the PBGC can’t meet the payments, taxpayers are left holding the bag. It’s another variation on Wall Street’s playbook of maximizing personal gain and minimizing personal risk. If you screw up royally, you can still walk away like royalty. Taxpayers will bail you out. Personal responsibility is completely foreign to the highest echelons of the Street. Citigroup’s stock fell 44 percent in 2011, but its CEO, Vikram Pandit, got at least $5.45 million on top of a retention bonus of $16.7 million. The stock of JPMorgan Chase fell 20 percent, but its CEO, Jamie Dimon, was awarded a package worth $22.9 million. The higher you go in corporate America as a whole, the less of a relationship there is between risk and reward. Executives whose pay is linked to the value of their firm’s shares get a free ride when the stock market as a whole rises, even if they didn’t lift a finger. On the other hand, to protect their wallets against any risk that their firm’s share price might fall, they can place countervailing bets in derivatives markets. This sort of hedging helped the head of AIG, Hank Greenberg, collect $250 million in 2008, when AIG collapsed.
Posted on: Sun, 20 Oct 2013 22:00:16 +0000
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