The financial crisis that continues today originated from a series of decisions, some good and some bad, but was fermented primarily by greed, and poor decision-making and due diligence. One approach to evaluating the crisis is by reviewing a timeline of events. Many analysts blame the creation of Fannie Mae and Freddie Mac for the crisis and others cite the Equal Credit Opportunity Act and the Community Reinvestment Act. Yet these date from the late 1960s and 1970s. In fact, these efforts were very successful for an extended period of time. What is clear as we review the selection of events detailed below, it is decisions that were made in the 1990s, and especially after 2000 that led to this crisis. As you read through this history you will see an accelerated series of decisions and events that with some thought we can see that they clearly led to the financial crisis. With the placement of a greater value on capital preservation by the banking industry or a well timed focus on regulation and oversight the crisis may have been headed off. Follow the points below, and evaluate for yourself. I see that there was a general relaxation of lending standards, an increase in greed, and a lack of oversight.
- 1968 – Federal National Mortgage Association (Fannie Mae) is converted from an entity of the federal government to a government sponsored enterprise (GSE) which will purchase and securitize mortgages to facilitate liquidity in the mortgage market.
- 1970 – Federal Home Loan Mortgage Corporation (Freddie Mac) is created by an act of Congress to be a government sponsored enterprise (GSE).
- 1974 – The Equal Credit Opportunity Act sanctions financial institutions that are guilty of discrimination.
- 1977 – The Community Reinvestment Act mandates that banks and savings and loans offer credit to businesses and individuals in lower income areas.
- 1986 – The Tax Reform Act of 1986 forbids the deduction of interest on consumer loans, but allows the deduction of interest on mortgage loans and home equity loans, and individuals use home equity loans to retire consumer loan debt.
- 1989 – 1995 – The Savings and Loan Crisis leads to the Financial Institution Reform, Recovery and Enforcement Act (FIRREA) that established the Resolution Trust Corporation (RTC)
- 1992 – The Federal Housing Enterprises Financial safety and Soundness Act of 1992 requires Fannie Mae and Freddie Mac to devote a fraction of their lending to back affordable housing and increases their securitization of mortgage loans.
- 1995 – 2001 – The Dot-com bubble builds and then collapses.
- 1997 – 2008 – The credit default swap purchases market grows at the same time that the asset backed securities market grows.
- September 1999 - Fannie Mae relaxes credit requirements facilitating bank efforts to extend home mortgages to those who are not able to qualify for conventional loans.
- 2000 – 2003 – The recession of 2001 leads to expansionary fiscal and monetary policies.
- 2003 – The mortgage denial rate has fallen to below 15% for conventional home loans from nearly 30% in 1997.
- 2004 – The homeownership rate approaches 70%.
- May 2006 – The first subprime related bankruptcy- Merit Financial Inc.
- April 2, 2007 – The largest subprime lender, New Century Financial, declares bankruptcy.
- April 18, 2007 – Freddie Mac is fined $3.8 million by the Federal Election Commission for illegal campaign contributions.
- August 6, 2007 – The American Home Mortgage Investment Corporation declares bankruptcy.
- August 9, 2007 – The French investment bank, BNP Paribas suspends three funds invested in subprime mortgage debt.
- September 2007 – The Libor rate approaches 6.8%, and is above the Bank of England’s benchmark rate of 6.75%.
- March 16, 2008 – Bear Stearns is acquired by JP Morgan Chase.
- July 11, 2008 – Indymac Bank is placed in the receivership of the FDIC by the Office of Thrift Supervision.
- September 7, 2008 – The federal takeover of Fannie Mae and Freddie Mac.
- September 14, 2008 – Bank of America acquires Merrill Lynch.
- September 15, 2008 – Lehman Brothers declares bankruptcy.
- September 16, 2008 – Moody’s and Standard and Poor’s downgrade AIG’s credit.
- September 29, 2008 – The Emergency Economic Stabilization Act is defeated 228-205 in the House.
- October 3, 2008 – The Emergency Economic Stabilization Act is passed by Congress creating the $700 billion Troubled Assets Relief Program (TARP).
- October 3, 2008 – Wells Fargo acquires Citigroup.
- October 6, 2008 – The Federal Reserve will provide $900 billion in short-term loans to banks.
- October 8, 2008 – The White House changes plans and considers purchasing equity in private banks with TARP funds.
- October 14, 2008 – The White House uses $250 billion of TARP funds to purchasing equity in private banks.
- November 12, 2008 – Treasury Secretary Paulson determines that the remaining portion of the TARP funds should be used to recapitalize banks.
- November 25, 2008 – The Federal Reserve pledges another $800 billion to the banking system, including over $600 billion to purchases mortgage bonds.
January 16, 2009 – Congress voted to not block the release of the second half of the TARP funds.
