The 2008 financial crisis was a major worldwide financial crisis which started in the U.S. The first phase was the subprime mortgage crisis, which began in early 2007 as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries. The crisis exacerbated the Great Recession, a global recession that began in late 2007, and contributed to major crises in Iceland and the eurozone.
During the 1990s, the U.S. Congress passed legislation intended to expand affordable housing through looser financing laws, and in 1999 parts of the 1933 Banking Act (Glass–Steagall Act) were repealed, enabling institutions to mix low-risk operations, such as commercial banking and insurance, with higher-risk operations such as investment banking and proprietary trading. As the Federal Reserve (Fed) lowered the federal funds rate from 2000 to 2003, institutions increasingly targeted low-income homebuyers, largely belonging to racial minorities, with high-risk subprime loans; this development went unattended by regulators. As interest rates rose from 2004 to 2006, monthly payments on these largely adjustable-rate mortgages spiked, leading to a wave of defaults, foreclosures, and bankruptcies among subprime lenders in early 2007. As housing demand and prices continued to fall, the financial contagion spread to global credit markets by August 2007. In March 2008, Bear Stearns, one of the largest U.S. investment banks, was sold to JPMorgan Chase in a "fire sale" backed by Fed financing.
In response to the crisis, governments around the world deployed massive bailouts of financial institutions and used monetary and fiscal policy to prevent a collapse of the global financial system. On September 7, 2008, Fannie Mae and Freddie Mac, two government-sponsored enterprises which owned or guaranteed half of the U.S. housing market, were seized by the federal government. On September 15, Lehman Brothers filed for the largest bankruptcy in the country's history, which was followed that month by a Fed bailout of American International Group and the seizure of Washington Mutual in the largest bank failure in U.S. history. On October 3, Congress passed the Emergency Economic Stabilization Act, authorizing the Treasury Department to purchase toxic assets and bank stocks through the $700 billion Troubled Asset Relief Program (TARP). The Fed began a program of quantitative easing by buying treasury bonds and other assets, and the American Recovery and Reinvestment Act, signed in February 2009 by President Barack Obama, included various measures which, combined with actions taken in other countries, ended the worst of the Great Recession by mid-2009.
Assessments of the crisis's impact in the U.S. vary, but suggest that some 8.7 million jobs were lost, causing unemployment to rise from 5% in 2007 to a high of 10% in October 2009. The percentage of citizens living in poverty rose from 12.5% in 2007 to 15.1% in 2010. The Dow Jones Industrial Average fell by 53% between October 2007 and March 2009, and some estimates suggest that one in four households lost 75% or more of their net worth. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed, overhauling financial regulations. It was opposed by many Republicans, and it was weakened by the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The Basel III capital and liquidity standards were also adopted by countries around the world.
The 2008 financial crisis was a major worldwide financial crisis which started in the United States. The first phase was the subprime mortgage crisis, which began in early 2007 as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries. The crisis exacerbated the Great Recession, a global recession that began in late 2007, and contributed to major crises in Iceland and the eurozone.
During the 1990s, the U.S. Congress passed legislation intended to expand affordable housing through looser financing laws, and in 1999 parts of the 1933 Banking Act (Glass–Steagall Act) were repealed, enabling institutions to mix low-risk operations, such as commercial banking and insurance, with higher-risk operations such as investment banking and proprietary trading. As the Federal Reserve (Fed) lowered the federal funds rate from 2000 to 2003, institutions increasingly targeted low-income homebuyers, largely belonging to racial minorities, with high-risk subprime loans; this development went unattended by regulators. As interest rates rose from 2004 to 2006, monthly payments on these largely adjustable-rate mortgages spiked, leading to a wave of defaults, foreclosures, and bankruptcies among subprime lenders in early 2007. As housing demand and prices continued to fall, the financial contagion spread to global credit markets by August 2007. In March 2008, Bear Stearns, one of the largest U.S. investment banks, was sold to JPMorgan Chase in a "fire sale" backed by Fed financing.
In response to the crisis, governments around the world deployed massive bailouts of financial institutions and used monetary and fiscal policy to prevent a collapse of the global financial system. On September 7, 2008, Fannie Mae and Freddie Mac, two government-sponsored enterprises which owned or guaranteed half of the U.S. housing market, were seized by the federal government. On September 15, Lehman Brothers filed for the largest bankruptcy in the country's history, which was followed that month by a Fed bailout of American International Group and the seizure of Washington Mutual in the largest bank failure in U.S. history. On October 3, Congress passed the Emergency Economic Stabilization Act, authorizing the Treasury Department to purchase toxic assets and bank stocks through the $700 billion Troubled Asset Relief Program (TARP). The Fed began a program of quantitative easing by buying treasury bonds and other assets, and the American Recovery and Reinvestment Act, signed in February 2009 by President Barack Obama, included various measures which, combined with actions taken in other countries, ended the worst of the Great Recession by mid-2009.
Assessments of the crisis's impact in the U.S. vary, but suggest that some 8.7 million jobs were lost, causing unemployment to rise from 5% in 2007 to a high of 10% in October 2009. The percentage of citizens living in poverty rose from 12.5% in 2007 to 15.1% in 2010. The Dow Jones Industrial Average fell by 53% between October 2007 and March 2009, and some estimates suggest that one in four households lost 75% or more of their net worth. In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed, overhauling financial regulations. It was opposed by many Republicans, and it was weakened by the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. The Basel III capital and liquidity standards were also adopted by countries around the world.
Background
The crisis worsened the Great Recession, a global recession that began in mid-2007. It was also followed by the euro area crisis, which began with the start of the Greek government-debt crisis in late 2009, and the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three of the major banks in Iceland and, relative to the size of its economy, was the largest economic collapse suffered by any country in history. It was among the five worst financial crises the world had experienced and led to a loss of more than $2 trillion from the global economy. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 (~$15.4 trillion in 2025) trillion. The increase in cash out refinancings, as home values rose, fueled an increase in consumption that could no longer be sustained when home prices declined. Many financial institutions owned investments whose value was based on home mortgages such as mortgage-backed securities, or credit derivatives used to insure them against failure, which declined in value significantly. The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.
Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices in late 2008 and early 2009. The crisis rapidly spread into a global economic shock, resulting in several bank failures. Economies worldwide slowed during this period since credit tightened and international trade declined. Housing markets suffered and unemployment soared, resulting in evictions and foreclosures. Several businesses failed. From its peak in the second quarter of 2007 at $61.4 trillion, household wealth in the United States fell $11 trillion, to $50.4 trillion by the end of the first quarter of 2009, resulting in a decline in consumption, then a decline in business investment. In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the U.S. was 8.4%. The U.S. unemployment rate peaked at 11.0% in October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.
The economic crisis started in the U.S. but spread to the rest of the world. U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007 and the rest of the world depended on the U.S. consumer as a source of demand. Toxic securities were owned by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis and caused a decrease in international trade. Reductions in the growth rates of developing countries were due to falls in trade, commodity prices, investment and remittances sent from migrant workers (example: Armenia). States with fragile political systems feared that investors from Western states would withdraw their money because of the crisis. As part of national fiscal policy response to the Great Recession, governments and central banks, including the Federal Reserve, the European Central Bank and the Bank of England, provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal policy and monetary policy to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the integral commercial paper markets, avoid the risk of a deflationary spiral, and provide banks with enough funds to allow customers to make withdrawals. In effect, the central banks went from being the "lender of last resort" to the "lender of only resort" for a significant portion of the economy. In some cases the Fed was considered the "buyer of last resort". During the fourth quarter of 2008, these central banks purchased US$2.5 trillion (~$3.67 trillion in 2025) of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action in world history. Following a model initiated by the 2008 United Kingdom bank rescue package, the governments of European nations and the United States guaranteed the debt issued by their banks and raised the capital of their national banking systems, ultimately purchasing $1.5 trillion newly issued preferred stock in major banks. The Federal Reserve created a lot of new currency as a method to combat the liquidity trap.
Bailouts came in the form of trillions of dollars of loans, asset purchases, guarantees, and direct spending. Significant controversy accompanied the bailouts, such as in the case of the AIG bonus payments controversy, leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis. Alistair Darling, the U.K.'s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that Britain came within hours of "a breakdown of law and order" the day that Royal Bank of Scotland was bailed-out. Instead of financing more domestic loans, some banks instead spent some of the stimulus money in more profitable areas such as investing in emerging markets and foreign currencies.
In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the United States to "promote the financial stability of the United States". The Basel III capital and liquidity standards were adopted worldwide. Since the 2008 financial crisis, consumer regulators in America have more closely supervised sellers of credit cards and home mortgages in order to deter anticompetitive practices that led to the crisis.
In total, 47 bankers served jail time as a result of the crisis, over half of whom were from Iceland, where the crisis was the most severe and led to the collapse of all three major Icelandic banks. In April 2012, Geir Haarde of Iceland became the only politician to be convicted as a result of the crisis. In the aftermath of the crisis, U.S. authorities intensified enforcement actions against financial misconduct, including high-profile insider trading prosecutions such as that of Raj Rajaratnam, who was convicted in 2011. Only one banker in the United States served jail time as a result of the crisis, Kareem Serageldin, a banker at Credit Suisse who was sentenced to 30 months in jail and returned $24.6 million in compensation for manipulating bond prices to hide $1 billion of losses. No individuals in the United Kingdom were convicted as a result of the crisis. In SEC v. Goldman Sachs, Goldman Sachs paid a $550 million civil penalty and acknowledged that its marketing materials for CDO contained incomplete information, settling securities fraud charges after allegedly anticipating the financial crisis and selling toxic investments to its clients.
With fewer resources to risk in creative destruction, the number of patent applications was flat, compared to exponential increases in patent application in prior years.
American families did not fare well, nor did the wealthy families. However, half of the poorer families in the United States did not have wealth declines at all during the crisis because they generally did not own financial investments whose value could fluctuate. The Federal Reserve surveyed 4,000 households from 2007 to 2009, and found that the total wealth of 63% of all Americans declined in that period and 77% of the richest families had a decrease in total wealth, while only 50% of those on the poorer families suffered a decrease.
Timeline
The following is a timeline of the major events of the financial crisis, including government responses, and the subsequent economic recovery.
Pre-2007
April 28, 2004: A meeting is held in the basement of the Federal Reserve with the Gang of Five (Goldman Sachs, Lehman Brothers, Merrill Lynch, Bear Stearns and Morgan Stanley) and the five members of the Securities and Exchange Commission to create an exemption for the five largest investment banks in the U.S. from having to adhere to the net capital rule. This permitted these banks to take on much more debt.
May 19, 2005: Fund manager Michael Burry closed a credit default swap against subprime mortgage bonds with Deutsche Bank valued at $60 million – the first such CDS. He projected they would become volatile within two years of the low "teaser rate" of the mortgages expiring.
2006: After years of price increases, housing prices peaked and mortgage loan delinquency rose—the first sign of the bursting of the United States housing bubble. Due to increasingly lax underwriting standards, one-third of all mortgages in 2006 were subprime or no-documentation loans, which comprised 17% of home purchases that year.
May 2006: JPMorgan warned clients of a housing downturn, and rising foreclosure rates, especially in sub-prime mortgages.
August 2006: The yield curve inverted, signaling a recession was likely within a year or two.
November 2006: UBS warned of "an impending crisis in the U.S. housing market".
2007 (January–August)
February 27, 2007: Stock prices in China and the U.S. fell by the most since 2003 as reports of a decline in home prices and durable goods orders stoked growth fears, with Alan Greenspan predicting a recession. Due to increased delinquency rates in subprime lending, Freddie Mac said that it would stop investing in certain subprime loans.
August 9, 2007: BNP Paribas blocked withdrawals from three of its hedge funds with a total of $2.2 billion in assets under management, due to "a complete evaporation of liquidity", making valuation of the funds impossible – a clear sign that banks were refusing to do business with each other.
August 16, 2007: The DJIA closes at 12,945.78 after falling on 12 out of the previous 20 trading days following its peak. It had fallen 1,164.63 or 8.3%.