Changes

Multiple crises started pulling down major financial players.  Countrywide, which originated 20% of all American mortgages in 2006, collapsed and was bought up by Bank of America.  Bear Stearns, a large investment bank, went under; the government arranged a sale to JPMorgan Chase; stock holders lost about 90% of their investment, and the confidence in other banks was undermined.

Multiple crises started pulling down major financial players.  Countrywide, which originated 20% of all American mortgages in 2006, collapsed and was bought up by Bank of America.  Bear Stearns, a large investment bank, went under; the government arranged a sale to JPMorgan Chase; stock holders lost about 90% of their investment, and the confidence in other banks was undermined.

On September 7, 2008, the government took control of the two largest mortgage holders, "Fannie Mae"<ref> Federal National Mortgage Association (FNMA)</ref> and "Freddy Mac"<ref>Federal Home Loan Mortgage Corporation (FHLMC) </ref>. The two had lost $15 billion on the $5.4 trillion in mortgages they owned, and their notes were widely held in China and many other countries.  The fear was that if the Treasury did not act the world's confidence in the US financial system would collapse.  However the rest of the world was in trouble too.  The stock markets in China and Russia plunged 50%, and the British Treasury had to take over its largest mortgage company, Northern Rock.  Vast sums of money flowed into the US because it was safer there than anywhere else.

On September 7, 2008, the government took control of the two largest mortgage holders, "Fannie Mae"<ref> Federal National Mortgage Association (FNMA)</ref> and "Freddy Mac"<ref>Federal Home Loan Mortgage Corporation (FHLMC) </ref>. The two had lost $15 billion on the $5.4 trillion in mortgages they owned, and their notes were widely held in [[China]] and many other countries.  The fear was that if the Treasury did not act the world's confidence in the US financial system would collapse.  However the rest of the world was in trouble too.  The stock markets in China and [[Russia]] plunged 50%, and the [[United Kingdom|British]] Treasury had to take over its largest mortgage company, [[Northern Rock]].  Vast sums of money flowed into the US because it was safer there than anywhere else.

By September the major banks were no longer lending money and most reported huge losses as they wrote down the value of the CDOs and other assets. Short sellers sold large amounts of stock in threatened companies, causing further panic and driving down share prices.<ref> The short sellers did not own the shares; the practice was stopped on Sept. 19, 2008, by the Securities and Exchange Commission because it destabilized markets.</ref> Lehman Brothers, one of the oldest and largest banks in New York, went bankrupt on Sept. 15 with no one to rescue it.  Merrill Lynch was sold to Bank of America for %50 billion, about half its value a few months before. Investors realized that AIG could no longer honor the insurance policies it wrote. It lost $13 billion in the first half of 2008 and its shares fell 95% in value. AIG was "too big" to be allowed to fail, so it was given an $85 billion loan from the government; in return the government received 80% of its stock.<ref> The Federal Reserve Bank of New York, part of the Federal Reserve System, handled the AIG case.</ref> In effect AIG, along with Fanny Mae and Freddy Mac were nationalized.  The Federal Reserve, with $800 billion in assets, was assisted by the Treasury, which gave it more funds.

By September the major banks were no longer lending money and most reported huge losses as they wrote down the value of the CDOs and other assets. Short sellers sold large amounts of stock in threatened companies, causing further panic and driving down share prices.<ref>The short sellers did not own the shares; the practice was stopped on Sept. 19, 2008, by the [[Securities and Exchange Commission]] because it destabilized markets.</ref> Lehman Brothers, one of the oldest and largest banks in New York, went bankrupt on Sept. 15 with no one to rescue it.  Merrill Lynch was sold to Bank of America for %50 billion, about half its value a few months before. Investors realized that AIG could no longer honor the insurance policies it wrote. It lost $13 billion in the first half of 2008 and its shares fell 95% in value. AIG was "too big" to be allowed to fail, so it was given an $85 billion loan from the government; in return the government received 80% of its stock.<ref> The Federal Reserve Bank of New York, part of the Federal Reserve System, handled the AIG case.</ref> In effect AIG, along with Fanny Mae and Freddy Mac were nationalized.  The Federal Reserve, with $800 billion in assets, was assisted by the Treasury, which gave it more funds.

===$700 billion bailout proposed===

===$700 billion bailout proposed===

"We're in the midst of a serious financial crisis," President Bush warned the nation on Sept. 25, 2008.:

"We're in the midst of a serious financial crisis," [[George W. Bush|President Bush]] warned the nation on Sept. 25, 2008.:

:Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money....without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession. <ref>see [http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html Bush speech online] </ref>

{{QuoteBox|Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending. Credit markets have frozen. And families and businesses have found it harder to borrow money....without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold: More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.<ref>see [http://www.whitehouse.gov/news/releases/2008/09/20080924-10.html Bush speech online]</ref>}}

On September 19, 2008, the Treasury and Federal Reserve proposed a major rescue plan--the largest government intervention in the economy since World War II. The key was for the Treasury to purchase $700 billion of the CDOs. The assumption was that the underlying mortgages were mostly perfectly good in the long run, but that a short-run panic had destroyed the market for them and frozen the financial system.  The bailout was needed, Bush said, to avert a major disaster for the economy.   Democrats signed on to the bailout plan, adding provisions for Congressional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House Republicans said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

On September 19, 2008, the Treasury and Federal Reserve proposed a major rescue plan--the largest government intervention in the economy since [[World War II]]. The key was for the Treasury to purchase $700 billion of the CDOs. The assumption was that the underlying mortgages were mostly perfectly good in the long run, but that a short-run panic had destroyed the market for them and frozen the financial system.  The bailout was needed, Bush said, to avert a major disaster for the economy. [[Democratic Party|Democrats]] signed on to the bailout plan, adding provisions for [[Congress]]ional oversight and caps on CEO compensation; but at the last moment on Sept 25, 2008 House [[Republican Party|Republicans]] said no, and GOP presidential nominee [[John McCain]] held off endorsement.   

Conservatives were split on what to do.  Many agreed with Bush that the bailout proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the bailout.  The American Bankers Association and the Mortgage Bankers Association are fighting against any amendment that would reduce mortgage obligations for people in bankruptcy, while directing all the government funds to the banking industry.The U.S. Chamber of Commerce, normally an outspoken advocate of big corporate interests, instead stressed the crisis's impact on small and midsize businesses. "We're looking at an economy that was slipping toward recession even before this crisis culminated in a market lockup last week," said Chamber economist Martin Regalia. The debate in Congress, he said, "is costing every American taxpayer money, directly."<ref>Elizabeth Williamson, "Big Business Wants Deal, Setbacks and All," [http://online.wsj.com/article/SB122238988380577457.html ''Wall Street Journal'' Sept. 26, 2008]</ref>  Democratic nominee Senator [[Barack Obama]] endorsed the plan, as amended by Congressional Democrats. On the other hand, ordinary taxpayers and "Main Street", that is businessmen who operated at the local level, were highly suspicious of Wall Street. McCain, blaming the crisis on "the corruption and manipulation of our home mortgage system", rejected the bailout as a favor for Wall Street and little help to Main Street. Believers in the market economy insisted that the market should run its course, and opposed the bailout.<ref> See comments from a range of economists at [http://www.nytimes.com/2008/09/26/business/26assess.html?ref=business Peter S. Goodman, "Credit Enters a Lockdown," ''New York Times'' Sept. 25, 2008]</ref>

[[Conservative]]s were split on what to do.  Many agreed with Bush that the bailout proposed by Treasury Secretary [[Henry M. Paulson]] was urgently needed. Large banks and corporations strongly endorsed the bailout.  The [[American Bankers Association]] and the [[Mortgage Bankers Association]] are fighting against any amendment that would reduce mortgage obligations for people in bankruptcy, while directing all the government funds to the banking industry.The U.S. Chamber of Commerce, normally an outspoken advocate of big corporate interests, instead stressed the crisis's impact on small and midsize businesses. "We're looking at an economy that was slipping toward recession even before this crisis culminated in a market lockup last week," said Chamber economist Martin Regalia. The debate in Congress, he said, "is costing every American taxpayer money, directly."<ref>Elizabeth Williamson, "Big Business Wants Deal, Setbacks and All," [http://online.wsj.com/article/SB122238988380577457.html ''Wall Street Journal'' Sept. 26, 2008]</ref>  Democratic nominee Senator [[Barack Obama]] endorsed the plan, as amended by Congressional Democrats. On the other hand, ordinary taxpayers and "Main Street", that is businessmen who operated at the local level, were highly suspicious of [[Wall Street]]. McCain, blaming the crisis on "the corruption and manipulation of our home mortgage system", rejected the bailout as a favor for Wall Street and little help to Main Street. Believers in the market economy insisted that the market should run its course, and opposed the bailout.<ref> See comments from a range of economists at [http://www.nytimes.com/2008/09/26/business/26assess.html?ref=business Peter S. Goodman, "Credit Enters a Lockdown," ''New York Times'' Sept. 25, 2008]</ref>

Also on Sept. 25, Washington Mutual, the 6th largest bank in the US with $310 billion in assets, went bankrupt after a run in which depositors withdrew $17 billion in a few days. Its stockholders lost all their money, the US government took it over (through the [[FDIC]], which insures ordinary bank deposits), and resold it the same day to the biggest New York bank, JPMorgan Chase. It was the largest commercial bank failure in American history, by far. Meanwhile the #4 U.S. bank, Wachovia, was in desperate condition, burdened with some $120 billion in toxic securities.<ref>In the [[Great Depression]], no major banks failed in any major cities, although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>

Also on Sept. 25, Washington Mutual, the 6th largest bank in the US with $310 billion in assets, went [[bankrupt]] after a run in which depositors withdrew $17 billion in a few days. Its stockholders lost all their money, the US government took it over (through the [[FDIC]], which insures ordinary bank deposits), and resold it the same day to the biggest New York bank, JPMorgan Chase. It was the largest commercial bank failure in American history, by far. Meanwhile the #4 U.S. bank, Wachovia, was in desperate condition, burdened with some $120 billion in toxic securities.<ref>In the [[Great Depression]], no major banks failed in any major cities, although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>

==See also==

==See also==