Government takeover of home mortgage lenders
The United States director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, on September 7, 2008 announced his decision to place two United States Government sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by FHFA.[18][19][20] United States Treasury Secretary Henry Paulson, at the same press conference stated that placing the two GSEs into conservatorship was a decision he fully supported, and said that he advised "that conservatorship was the only form in which I would commit taxpayer money to the GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction."[18] The same day, Federal Reserve Bank Chairman Ben Bernanke stated in support: "I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies."[21]
[edit] Major financial firm crisis
On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. The significance of the Lehman Brothers bankruptcy is disputed with some assigning it a pivotal role in the unfolding of subsequent events. The principals involved, Ben Bernanke and Henry Paulson, dispute this view, citing a volume of toxic assets at Lehman which made a rescue impossible.[22][23] Immediately following the bankruptcy, JPMorgan Chase provided the broker dealer unit of Lehman Brothers with $138 billion to "settle securities transactions with customers of Lehman and its clearance parties" according to a statement made in a New York City Bankruptcy court filing.[24]
The same day, the sale of Merrill Lynch to Bank of America was announced.[25] The beginning of the week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15, and Wednesday, September 17. On September 16, the large insurer American International Group (AIG), a significant participant in the credit default swaps markets, suffered a liquidity crisis following the downgrade of its credit rating. The Federal Reserve, at AIG's request, and after AIG has shown that it could not find lenders willing to save it from insolvency, created a credit facility for up to US$85 billion in exchange for a 79.9% equity interest, and the right to suspend dividends to previously issued common and preferred stock.[26]
Money market funds insurance and short sales prohibitions
On September 16, the Reserve Primary Fund, a large money market mutual fund, lowered its share price below $1 because of exposure to Lehman debt securities. This resulted in demands from investors to return their funds as the financial crisis mounted.[27] By the morning of September 18, money market sell orders from institutional investors totalled $0.5 trillion, out of a total market capitalization of $4 trillion, but a $105 billion liquidity injection from the Federal Reserve averted an immediate collapse.[28][29] On September 19 the U.S. Treasury offered temporary insurance (akin to FDIC insurance of bank accounts) to money market funds.[30] Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States.[31] Similar measures were taken by authorities in other countries.[32] Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission[33][34]
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