Changes

The crisis originated in the [[United States of America|United States]] and Western Europe, and has impacted every country in the world. Banks and financial companies have reported losses of over one trillion [[dollar]]s; investors have suffered [[paper loss|"paper losses"]] of many trillions. U.S. stocks are down 50% from their peak in 2007.<ref> For most people the loss is a "paper" loss because they still own the stock and it might go up, or down. If they bought stock in 2003 for $1000, watched it go to $1500 in 2008, then drop to $1000 again in 2008, their "paper loss" is $500 but their real loss is zero since they are back where they started. People who bought at $800 still have made a $200 paper profit. People who bought at $1200, say, have a paper loss of $200. The paper loss or gain becomes real when they finally sell the stock. See [[Paper loss]] for more details</ref> Paper losses for owners of stock in major financial institution have been over 70%, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 50-70% in major countries and [[pension]] funds have large paper losses.  Paper losses in real estate have been in the trillions; the average price of American houses fell 20%, with 30% and higher declines in California and Florida.  However, thus far ordinary depositors with cash in the bank have suffered no losses. Owners of stocks in the 5000 largest U.S. corporations have paper losses of $10 trillion dollars in 2008, dropping to $10 trillion in October from $20 trillion in late 2007.  

The crisis originated in the [[United States of America|United States]] and Western Europe, and has impacted every country in the world. Banks and financial companies have reported losses of over one trillion [[dollar]]s; investors have suffered [[paper loss|"paper losses"]] of many trillions. U.S. stocks are down 50% from their peak in 2007.<ref> For most people the loss is a "paper" loss because they still own the stock and it might go up, or down. If they bought stock in 2003 for $1000, watched it go to $1500 in 2008, then drop to $1000 again in 2008, their "paper loss" is $500 but their real loss is zero since they are back where they started. People who bought at $800 still have made a $200 paper profit. People who bought at $1200, say, have a paper loss of $200. The paper loss or gain becomes real when they finally sell the stock. See [[Paper loss]] for more details</ref> Paper losses for owners of stock in major financial institution have been over 70%, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 50-70% in major countries and [[pension]] funds have large paper losses.  Paper losses in real estate have been in the trillions; the average price of American houses fell 20%, with 30% and higher declines in California and Florida.  However, thus far ordinary depositors with cash in the bank have suffered no losses. Owners of stocks in the 5000 largest U.S. corporations have paper losses of $10 trillion dollars in 2008, dropping to $10 trillion in October from $20 trillion in late 2007.  

In late September the crisis focused on liquidity--financial companies owned hundreds of billions of dollars of "toxic" securities, mostly based on U.S. [[mortgage]]s; they could not sell the toxic securities because no one knew how much they were worth, and large scale loans between major institutions stopped flowing as the system lost liquidity and froze up. A $800 billion rescue plan became law in the U.S. October 3, but its impact will not be clear for a while. Meanwhile Europe's economic crisis continues to deteriorate, as trillions of dollars in losses accumulate there and in Russia, China and India and in many smaller countries.  International agencies such as the International Monetary Fund are trying to arrange emergency bailouts for medium-sized countries, like Pakistan.  All around the world people are sending their money to the U.S. and Japan because the banks there are safer than their own banks.  The price of oil, which reached $150 a barrel in the summer, plunged in half. That eased the gasoline crisis, helped commuters, and helped the airline industry.

In late September the crisis focused on liquidity--financial companies owned hundreds of billions of dollars of "toxic" securities, mostly based on U.S. [[mortgage]]s; they could not sell the toxic securities because no one knew how much they were worth, and large scale loans between major institutions stopped flowing as the system lost liquidity and froze up. A $800 billion rescue plan became law in the U.S. October 3, but its impact will not be clear for a while. Meanwhile Europe's economic crisis continues to deteriorate, as trillions of dollars in losses accumulate there and in Russia, China and India and in many smaller countries.  International agencies such as the International Monetary Fund are arranging emergency bailouts for medium-sized countries, like Pakistan and Ukraine.  All around the world people are sending their money to the U.S. and Japan because the banks there are safer than their own banks.  The price of oil, which reached $145 a barrel in the summer, plunged to under $50. That plunge eased the gasoline crisis, helped commuters, and helped the airline industry.

Both parties have expressed anger at the crisis, and have promised extensive new regulations of the financial industry. However the Republicans have blocked additional bailout aid to General Motors, which is on the verge of bankruptcy.

Both parties have expressed anger at the crisis, and have promised extensive new regulations of the financial industry. However the Republicans have blocked additional bailout aid to General Motors, which is on the verge of bankruptcy.

The Bush administration undertook a "bailout" program in which it took control of several of the largest financial institutions (Fannie Mae, Freddie Mac, and AIG insurance), forced the mergers of others, and purchased $125 billion of ownership in the 9 largest banks in the U.S.  

The Bush administration undertook a "bailout" program in which it took control of several of the largest financial institutions (Fannie Mae, Freddie Mac, and AIG insurance), forced the mergers of others, purchased $125 billion of ownership in the 9 largest banks in the U.S., and bailed out the largest bank, Citigroup.

Until October the crisis had little impact on the non-financial sectors of the world economy, but then negative impacts started appearing.  Companies could not borrow money for expansion or in some cases for routine operations, and had to cut back. Consumer spending fell and unemployment started to rise sharply.  By mid-November pessimistic reports were coming in daily from practically every sector of the  American economy. There were no bright spots, and with tax revenues down, state governments began large-scale cutbacks, especially in New York and California.

Until October the crisis had little impact on the non-financial sectors of the world economy, but then negative impacts started appearing.  Companies could not borrow money for expansion or in some cases for routine operations, and had to cut back. Consumer spending fell and unemployment started to rise sharply.  By November pessimistic reports were coming in daily from practically every sector of the  American economy. There were no bright spots, and with tax revenues down, state governments began large-scale cutbacks, especially in New York and California.

By late October it appeared the financial crisis was slowing down the economies of all countries of the world, leading perhaps to a serious recession with widespread unemployment and loss of business. The major countries have been taking aggressive steps to dissolve the liquidity freeze and get money flowing again, and to stimulate economies that are headed downward.

By late October it appeared the financial crisis was slowing down the economies of all countries of the world, leading perhaps to a serious recession with widespread unemployment and loss of business. The major countries have been taking aggressive steps to dissolve the liquidity freeze and get money flowing again, and to stimulate economies that are headed downward.

==Causes==

==Causes==

In ''The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities'', [[Howard Husock]] describes how the [[Community Reinvestment Act]] of 1977 and the expansion in 1995 contributed to the Financial Crisis of 2008. <ref>[http://www.city-journal.org/html/10_1_the_trillion_dollar.html The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities], Howard Husock, ''City Journal'', Winter 2000</ref>  

In 2000 [[Howard Husock]] warned that the [[Community Reinvestment Act]] of 1977 and the expansion in 1995 would prove expensive; however CRA loans comprise only about 5% of the problem. <ref>[http://www.city-journal.org/html/10_1_the_trillion_dollar.html The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities], Howard Husock, ''City Journal'', Winter 2000</ref>  

As hundreds of billions of dollars poured into the U.S. from abroad, financiers looked for imaginative ways to make a profit. They turned to [[real estate]].  In the early 2000s, U.S. interest rates were low and demand for housing was high, as housing prices soared, especially in California, Florida, Nevada and Arizona. Mortgage companies and banks were very eager to lend, especially to people with mediocre [[credit]] who would not previously have been eligible for mortgages and to speculators. Speculators were ordinary people who already had a house and who were hoping to make a large profit on the purchase and quick resale of another house or condominium.<ref> The only money the speculators had at risk was a down payment; sometimes the constuction company paid for the down payment and so the risk to the speculator was zero.</ref>  The expectation was that continuously rising house prices would cover the mortgage payments through refinancing. Many of the mortgages involved very low down payments and low monthly payments for the first year or two, after which the payments would start soaring. Sometimes the monthly payment at first was zero.  

As hundreds of billions of dollars poured into the U.S. from abroad, financiers looked for imaginative ways to make a profit. They turned to [[real estate]].  In the early 2000s, U.S. interest rates were low and demand for housing was high, as housing prices soared, especially in California, Florida, Nevada and Arizona. Mortgage companies and banks were very eager to lend, especially to people with mediocre [[credit]] who would not previously have been eligible for mortgages and to speculators. Speculators were ordinary people who already had a house and who were hoping to make a large profit on the purchase and quick resale of another house or condominium.<ref> The only money the speculators had at risk was a down payment; sometimes the construction company paid for the down payment and so the risk to the speculator was zero.</ref>  The expectation was that continuously rising house prices would cover the mortgage payments through refinancing. Many of the mortgages involved very low down payments and low monthly payments for the first year or two, after which the payments would start soaring. Sometimes the monthly payment at first was zero.  

Americans owed some $10 trillion on their mortgages, most of which were sound with payments made on time. However financiers bundled the mortgages into very complicated packages called "'''collateralized debt obligations''''<ref> That is, homeowners were obligated to pay the debts and the collateral behind them was the physical house.</ref> or CDOs. Hundreds of billions of dollars worth of CDO's were sold to banks, pension funds and financiers in the U.S. and Europe. Generally they borrowed cash to buy the CDOs.  The risk was that if the CDO's declines in value, they would not be able to repay those loans.  To minimize the risk, companies sold insurance called "credit default swaps" ('''CDS''') to guarantee payment of the CDOs. The largest seller was [[American International Group]] ('''AIG'''), the world's largest insurance company. The CDOs and CDS were especially attractive because they were not regulated by the government; experts are not sure how many trillions of dollars are involved.

Americans owed some $10 trillion on their mortgages, most of which were sound with payments made on time. However financiers bundled the mortgages into very complicated packages called "'''collateralized debt obligations''''<ref> That is, homeowners were obligated to pay the debts and the collateral behind them was the physical house.</ref> or CDOs. Hundreds of billions of dollars worth of CDO's were sold to banks, pension funds and financiers in the U.S. and Europe. Generally they borrowed cash to buy the CDOs.  The risk was that if the CDO's declines in value, they would not be able to repay those loans.  To minimize the risk, companies sold insurance called "credit default swaps" ('''CDS''') to guarantee payment of the CDOs. The largest seller was [[American International Group]] ('''AIG'''), the world's largest insurance company. The CDOs and CDS were especially attractive because they were not regulated by the government; experts are not sure how many trillions of dollars are involved.

==Bubble bursts==

==Bubble bursts==

The housing "bubble" burst in 2006-07, as prices plunged downward in the Sunbelt. Many speculators and homeowners could not meet their payments, especially those who had "sub-prime" mortgages because their [[income]] was low, or who had adjustable rate mortgages where the monthly payments started small then escalated.  [[Foreclosure]]s skyrocketed. With housing prices falling few people risked buying a new house (because it would soon be worth less than they paid for it). Construction firms had built millions of new houses that could not be sold but which glutted the market.

The housing "bubble" burst in 2006-07, as prices plunged downward in the Sunbelt. Many speculators and homeowners could not meet their payments, especially those who had "sub-prime" mortgages because their income was too low to support the eventual monthly payments, or who had adjustable rate mortgages where the monthly payments started small then escalated.  [[Foreclosure]]s skyrocketed. With housing prices falling few people risked buying a new house (because it would soon be worth less than they paid for it). Construction firms had built millions of new houses that could not be sold but which glutted the market.  By late 2008 half the home sales in the U.S. were by banks selling houses they had foreclosed on at low prices.  

The problem was that no one could figure out what CDOs were now worth, so very few were willing to buy them.  One major investment bank, Merrill Lynch, sold its CDOs for 22 cents on the dollar--a "[[fire sale]]" price that was less than they were worth in the long run, because in the long run the great majority of people will make their scheduled mortgage payments.

The problem was that no one could figure out what CDOs were now worth, so very few were willing to buy them.  One major investment bank, Merrill Lynch, sold its CDOs for 22 cents on the dollar--a "[[fire sale]]" price that was less than they were worth in the long run, because in the long run the great majority of people will make their scheduled mortgage payments.

[[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>

[[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>

A compromise bailout was agreed to by leaders of both parties but the "Emergency Economic Stabilization Act of 2008" (EESA)  was voted down in the House on Sept. 29.  Democrats favored the Bush bill 60%-40%, but Republicans voted no by  65-35%. The stock market lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed an expanded bailout bill, that added $100 billion in new subsidies to the original $700 billion, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, designed to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill. As the Treasury starts operation of the actual bailout, no one is sure how it will operate or whether it will succeed. The Treasury has dropped plans to buy toxic securities and instead has used $250 billion to prop up major banks.  It has refused to allow the money to be used to help the [[automobile]] industry.  The price of bank stocks has fallen sharply since the bailout passed, and analysts warns that one of the remaining giants, Citicorp, may be on the verge of collapse.  By mid-November the market had lost confidence in Treasury Secretary Paulson, who indicated he was baffled and would let the incoming Obama administration handle the unspent $450 billion.  The stock market jumped 6% on the news that Obama had picked New York banker Timothy Geithner to replace Paulson.<ref>Theo Francis, "Obama to Nominate New York Fed Chief Timothy Geithner as Treasury Secretary," [http://www.businessweek.com/election/2008/blog/archives/2008/11/obama_to_nomina.html?chan=top+news_top+news+index+-+temp_top+story ''Business Week'' Nov. 21, 2008]</ref>

A compromise bailout was agreed to by leaders of both parties but the "Emergency Economic Stabilization Act of 2008" (EESA)  was voted down in the House on Sept. 29.  Democrats favored the Bush bill 60%-40%, but Republicans voted no by  65-35%. The stock market lost a trillion dollars in value in one day as uncertainty reigned.  Finally a large majority passed an expanded bailout bill, that added $100 billion in new subsidies to the original $700 billion, plus tax breaks and a rise in FDIC insurance to $250,000 from $100,000, designed to reassure ordinary depositors. Both Obama and McCain voted for this version of the bill.  

 

By mid-November the market had lost confidence in Treasury Secretary Paulson, who indicated he was baffled and would let the incoming Obama administration handle the unspent $450 billion.  The stock market jumped 6% on the news that Obama had picked New York banker Timothy Geithner to replace Paulson.<ref>Theo Francis, "Obama to Nominate New York Fed Chief Timothy Geithner as Treasury Secretary," [http://www.businessweek.com/election/2008/blog/archives/2008/11/obama_to_nomina.html?chan=top+news_top+news+index+-+temp_top+story ''Business Week'' Nov. 21, 2008]</ref>  In late November the Federal Reserve announced it will buy up to $600 billion in mortgage-related assets from Fannie Mae and Freddie Mac, hoping to restart the housing and credit markets.

In October Paulson and Bernanke have used their new powers to take an ownership stake in the nine largest U.S. banks, of about $25 billion each. These banks are now partly owned and controlled by the government.

Hedge funds are private investment companies with $1.7 trillion in assets. They have lost $180 billion since July and some are near collapse. Investors are demanding their money back, and Wall Street in late October is bracing for a shake-out in the industry.<ref> Louise Story, "Citadel Chief denies rumors of trouble"  [http://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

Hedge funds are private investment companies with $1.7 trillion in assets. They have lost $180 billion since July and some are near collapse. Investors are demanding their money back, and Wall Street in late October is bracing for a shake-out in the industry.<ref> Louise Story, "Citadel Chief denies rumors of trouble"  [http://www.nytimes.com/2008/10/25/business/25hedge.html?ref=business ''New York Times,'' Oct 24, 2008]</ref>

==Collapse of #6 and #4 largest banks==

==Collapse of #6 and #4 largest banks==

===Washinton Mututal collapses===

===Washington Mutual collapses===

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.<ref>In the [[Great Depression]], only one major bank failed (New York's Bank of United States, in late 1930), although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

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.<ref>In the [[Great Depression]], only one major bank failed (New York's Bank of United States, in late 1930), although over 6000 small neighborhood and rural banks went under; depositors eventually received on average 85% of their deposits.</ref>  

===Wachivia collapses===

===Wachovia collapses===

Meanwhile the #4 U.S. bank, Wachovia, burdened by $120 billion in toxic securities,<ref> At the height of the bubble in 2006 Wachovia purchased  Golden West Financial, a California lender specializing in "pay-option" mortgages that enabled speculators to buy houses and pay very little a month for a year or two (at which time they expected to sell it for a profit). [http://www.brokeroutpost.com/reference/22657.htm explanation of pay-option loans]</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  However Wachovia then broke its deal and merged into Wells Fargo. The result is that four major banks now dominate the American economy (Bank of America, Citibank, JP Morgan Chase, and Wells Fargo), along with dozens of regional chains and thousands of small local banks.

Meanwhile the #4 U.S. bank, Wachovia, burdened by $120 billion in toxic securities,<ref> At the height of the bubble in 2006 Wachovia purchased  Golden West Financial, a California lender specializing in "pay-option" mortgages that enabled speculators to buy houses and pay very little a month for a year or two (at which time they expected to sell it for a profit). [http://www.brokeroutpost.com/reference/22657.htm explanation of pay-option loans]</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  However Wachovia then broke its deal and merged into Wells Fargo. The result is that four major banks now dominate the American economy (Bank of America, Citibank, JP Morgan Chase, and Wells Fargo), along with dozens of regional chains and thousands of small local banks.

===Bank of America renegotiates mortgages===

===Bank of America renegotiates mortgages===

In early October, Bank of America, the new owner of Countrywide, reached a settlement with 11 states that sued it over fraudulent practices. The state of Illinois accused Countrywide of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like a false promise of a "no closing costs loan." Countrywide gave special incentives to its brokers for selling impossible loans by paying higher commissions on them. In reviewing one Illinois mortgage broker’s sales, the Illinois complaint said the "vast majority of the loans had inflated income, almost all without the borrower’s knowledge."  Bank of America did not deny the charges and instead agreed to pay out $8.4 billion to 400,000 Countrywide customers. Countrywide will reduce principal balances for some people and cut interest rates for others. Rates for some people could decline to as low as 2.5% and remain at that level for five years.  Fannie Mae, Freddie Mac and IndyMac, now all owned by the federal government, have begun their own programs to modify mortgage terms for some hard-pressed borrowers.

In early October, Bank of America, the new owner of Countrywide, reached a settlement with 11 states that sued it over fraudulent practices. The state of Illinois accused Countrywide of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like a false promise of a "no closing costs loan." Countrywide gave special incentives to its brokers for selling impossible loans by paying higher commissions on them. In reviewing one Illinois mortgage broker’s sales, the Illinois complaint said the "vast majority of the loans had inflated income, almost all without the borrower’s knowledge."  Bank of America did not deny the charges and instead agreed to pay out $8.4 billion to 400,000 Countrywide customers. Countrywide will reduce principal balances for some people and cut interest rates for others. Rates for some people could decline to as low as 2.5% and remain at that level for five years.  Fannie Mae, Freddie Mac and IndyMac, now all owned by the federal government, have begun their own programs to modify mortgage terms for some hard-pressed borrowers.

<ref> Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

<ref> Gretchen Morgenson, "Countrywide to Set Aside $8.4 Billion in Loan Aid," [http://www.nytimes.com/2008/10/06/business/06countrywide.html?ref=business ''New York Times'' Oct. 6, 2008]</ref>   

===Citigroup falters===

===Largest bank rescued===

Citigroup, the third largest bank in the U.S., is tottering in late November despite its receipt of $25 billion in TARP bailout money. Its value on the stock market has plunged to $21 billion, down from $244 billion two years ago.  Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago.  Very heavy exposure to toxic mortgages is the main culprit.   

Citigroup, the world's largest bank was tottering in late November despite its receipt of $25 billion in TARP bailout money. Its value on the stock market plunged to $21 billion, down from $244 billion two years ago.  Round after round of layoffs have ended 75,000 jobs in 2008 out of 375,000 employees a year ago.  Very heavy exposure to toxic mortgages is the main culprit.  The government stepped in with the largest bailout yet, including $20 billion in new cash, and guarantees of toxic assets by the Treasury, FDIC and federal Reserve.

 

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a system-wide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street.  Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.   

At all times Citigroup used elaborate mathematical risk models that looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. The prevailing approach at Citigroup and the other big banks was to make money as fast as possible (generating annual bonuses of $10 to $30 million for senior executives), which assigning zero to the risk of a systemwide downturn. Such a downturn came with disastrous consequences for Citigroup and its rivals on Wall Street.  Even after Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO’s was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis.  Citigroup still holds $20 billion of mortgage-linked securities, most of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.<ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [http://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

Despite two federal bailouts Citigroup is still wobbly. It holds $20 billion of mortgage-linked securities that have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans of dubious value. And it also faces a potential massive losses on auto, mortgage and credit card loans as the economy worsens.<ref>Eric Dash and Julie Creswell, "Citigroup Pays for a Rush to Risk," [http://www.nytimes.com/2008/11/23/business/23citi.html?ref=business&pagewanted=all ''New York'' Times,’’ Nov. 22, 2008]</ref>

==Crisis in Auto industry==

==Crisis in Auto industry==

In 2008 a series of damaging blows drove the "Big Three" (GM, Ford and Chrysler) to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.), which prevents lower prices. The Big Three had in recent years stressed expensive, fuel-guzzling SUVs and large pickups. They were much more profitable than smaller, fuel-efficient cars. When gasoline prices shot past $4 in 2008, Americans stopped buying the big cars, and the Big Three saw their sales plummet.  The Financial Crisis played a role as no one was willing to loan GM the money to buy Chrysler. Consumer credit has tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car, so sales fell further.  Stock prices plummeted as shareholders worried about bankruptcy; GM's shares fell to 1946 levels. Intense debate is underway about a massive bailout, that would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency. President Bush has proposed changing the terms of that loan so it could be used to cover daily operating expenses. Republicans in Congress in mid-November blocked Democratic proposals to underwrite a new bailout of the auto industry, as industry leaders made an unconvincing case before Congress.

In 2008 a series of damaging blows drove the "Big Three" (GM, Ford and Chrysler) to the verge of bankruptcy. Part of the cause was very high labor costs (much higher than the foreign plants in the U.S.), which prevents lower prices. The Big Three had in recent years stressed expensive, fuel-guzzling SUVs and large pickups. They were much more profitable than smaller, fuel-efficient cars. When gasoline prices shot past $4 in 2008, Americans stopped buying the big cars, and the Big Three saw their sales plummet.  The Financial Crisis played a role as no one was willing to loan GM the money to buy Chrysler. Consumer credit has tightened and it became much harder for people with average or poor credit to obtain a bank loan to buy a car, so sales fell further.  Stock prices plummeted as shareholders worried about bankruptcy; GM's shares fell to 1946 levels. Intense debate is underway about a massive bailout, that would be in addition to a $25 billion loan Congress passed in September 2008 to assist in increasing fuel efficiency. President Bush has proposed changing the terms of that loan so it could be used to cover daily operating expenses, but Congress rejected that. Republicans in Congress in mid-November blocked Democratic proposals to underwrite a new bailout of the auto industry, as industry leaders made an unconvincing case before Congress.  President elect Obama and Democrats in Congress have demanded the Big Three come up with a highly specific plan with some chance of long-term viability, with the expectation that Congress will address the issue again in January 2009.

In addition to the Big Three hundreds of large suppliers of parts are in financial crisis as well; most would go under if the Big Three go bankrupt.

In addition to the Big Three hundreds of large suppliers of parts are in financial crisis as well; most would go under if the Big Three go bankrupt.