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The '''Financial Crisis of 2008''' is an ongoing financial crisis centered in the [[United States of America|United States]], with reverberations in [[Europe]] and around the [[world]]. Losses thus far have run to hundreds of billions of [[dollar]]s. Owners of stock in major financial institution have lost over 50% of their money, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 20%-50% in major countries and [[pension]] funds have lost value. The price of American houses fell 20%, with much larger declines in [[California]] and [[Florida]].  However, thus far ordinary depositors with cash in the bank have suffered no losses.  

The '''Financial Crisis of 2008''' is an ongoing financial crisis centered in the [[United States of America|United States]], with reverberations in [[Europe]] and around the [[world]]. Losses thus far have run to hundreds of billions of [[dollar]]s. Owners of stock in major financial institution have lost over 50% of their money, and owners of some have lost 99% as major [[bank]]s closed down. The [[stock market]] has declined 20%-50% in major countries and [[pension]] funds have lost value. The price of American houses fell 20%, with much larger 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 lost over 8 trillion dollars in 2008, dropping to $12 trillion in October from $20 trillion in January 2008.  

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.

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.

Although an American presidential election is in its last month, candidates have not focused on the crisis. Both major parties blame the other for neglecting adequate regulation. Both the major party candidates have expressed anger at the crisis, and have promised extensive new regulations of the financial industry.

Although an American presidential election is in its last month, candidates have not focused on the crisis. Both major parties blame the other for neglecting adequate regulation. Both the major party candidates have expressed anger at the crisis, and have promised extensive new regulations of the financial industry.

On September 7, 2008, the government took control of the two largest mortgage holders, "[[Fannie Mae]]"<ref> Federal National Mortgage Association (FNMA)</ref> and "[[Freddie 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.

On September 7, 2008, the government took control of the two largest mortgage holders, "[[Fannie Mae]]"<ref> Federal National Mortgage Association (FNMA)</ref> and "[[Freddie 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. The government had to add another $38 billion to the AIG rescue in October.<ref> Barry Meier and Mary Williams Walsh, "A.I.G. to get Additional $37.8 Billion," [http://www.nytimes.com/2008/10/09/business/economy/09insure.html?_r=1&ref=business&oref=slogin ''New York Times,'' Oct. 8, 2008] </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.<ref> See [http://www.nytimes.com/2008/10/02/business/02crisis.html?_r=1&hp=&adxnnl=1&oref=slogin&pagewanted=all&adxnnlx=1222952525-cWL0bOgQjxNvxNo+OH1qAw Joe Nocera, "36 Hours of Alarm and Action as Crisis Spiraled," ''New York Times'' (Oct. 1, 2008)]</ref>  

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.  The collapse of Lehman had a multiplier effect worldwide, severely weakening other big banks and sharly increasing the level of fear and distrust inside the system that caused bankers to sharply reduce their lending. 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. The government had to add another $38 billion to the AIG rescue in October.<ref> Barry Meier and Mary Williams Walsh, "A.I.G. to get Additional $37.8 Billion," [http://www.nytimes.com/2008/10/09/business/economy/09insure.html?_r=1&ref=business&oref=slogin ''New York Times,'' Oct. 8, 2008] </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.<ref> See [http://www.nytimes.com/2008/10/02/business/02crisis.html?_r=1&hp=&adxnnl=1&oref=slogin&pagewanted=all&adxnnlx=1222952525-cWL0bOgQjxNvxNo+OH1qAw Joe Nocera, "36 Hours of Alarm and Action as Crisis Spiraled," ''New York Times'' (Oct. 1, 2008)]</ref>  

    

    

===European crises===

===European crises===

O)n 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]], 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>  

O)n 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]], 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>  

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 so-called pay-option mortgages that enabled people to buy houses for a much higher price than they could afford, hoping that rising house prices would allow them to refinance later.</ref> was bought out by Citigroup on Sept. 29 in a deal engineered by the FDIC.  However Wachovia then announced a merger into Wells Fargo, and the matter is in court.

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 so-called pay-option mortgages that enabled people to buy houses for a much higher price than they could afford, hoping that rising house prices would allow them to refinance later.</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.

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.