Money market funds insurance and short sales prohibitions
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.[17] 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.[18] On September 19 the U.S. Treasury offered temporary insurance (akin to FDIC insurance of bank accounts) to money market funds.[19] 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.[20] Similar measures were taken by authorities in other countries.[21] Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission[22][23]
[edit] Troubled Asset Relief Program
Main articles: Emergency Economic Stabilization Act of 2008 and Troubled Assets Relief Program
On September 19, 2008 a plan intended to ameliorate the difficulties caused by the subprime mortgage crisis was proposed by the Secretary of the Treasury, Henry Paulson. He proposed a Troubled Assets Relief Program (TARP), later incorporated into the Emergency Economic Stabilization Act, which would permit the United States government to purchase illiquid assets, informally termed toxic assets, from financial institutions.[24][25] The value of the securities is extremely difficult to determine.[26]
Consultations between the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the U.S. Securities and Exchange Commission, Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage-backed securities. At the close of the week the Secretary of the Treasury and President Bush announced a proposal for the federal government to buy up to US$700 billion of illiquid mortgage backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market. Details of the bailout remained to be acted upon by Congress.[27][28][29][30]
[edit] Week of September 21, 2008
On Sunday, September 21, the two remaining investment banks, Goldman Sachs and Morgan Stanley, with the approval of the Federal Reserve, converted to bank holding companies, a status subject to more regulation, but with readier access to capital.[31] On September 21, Treasury Secretary Henry Paulson announced that the original proposal, which would have excluded foreign banks, had been widened to include foreign financial institutions with a presence in the US. The US administration was pressuring other countries to set up similar bailout plans.[32]
On Monday and Tuesday during the week of September 22, appearances were made by the Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve before Congressional committees and on Wednesday a prime-time presidential address was delivered by the President of the United States on television. Behind the scenes, negotiations were held refining the proposal which had grown to 42 pages from its original 3 and was reported to include both an oversight structure and limitations on executive salaries, with other provisions under consideration.
On September 25, agreement was reported by congressional leaders on the basics of the package;[33] however, general and vocal opposition to the proposal was voiced by the public.[34] On Thursday afternoon at a White House meeting attended by congressional leaders and the presidential candidates, John McCain and Barack Obama, it became clear that there was no congressional consensus, with Republican representatives and the ranking member of the Senate Banking Committee, Richard C. Shelby, strongly opposing the proposal.[35] The alternative advanced by conservative House Republicans was to create a system of mortgage insurance funded by fees on those holding mortgages; as the working week ended, negotiations continued on the plan, which had grown to 102 pages and included mortgage insurance as an option.[36][37][38] On Thursday evening Washington Mutual, the nation's largest savings and loan, was seized by the Federal Deposit Insurance Corporation and most of its assets transferred to JPMorgan Chase.[39] Wachovia, one of the largest US banks, was reported to be in negotiations with Citigroup and other financial institutions.[40]
[edit] Week of September 28, 2008
Early into Sunday morning an announcement was made by the United States Secretary of the Treasury and congressional leaders that agreement had been reached on all major issues: the total amount of $700 billion remained with provision for the option of creating a scheme of mortgage insurance.[41]
It was reported on Sunday, September 28, that a rescue plan had been crafted for the British mortgage lender Bradford & Bingley.[42] Grupo Santander, the largest bank in Spain, was slated to take over the offices and savings accounts while the mortgage and loans business would be nationalized.[43]
Fortis, a huge Benelux banking and finance company was partially nationalized on September 28, 2008, with Belgium, the Netherlands and Luxembourg investing a total of €11.2 billion (US$16.3 billion) in the bank. Belgium will purchase 49% of Fortis's Belgian division, with the Netherlands doing the same for the Dutch division. Luxembourg has agreed to a loan convertible into a 49% share of Fortis's Luxembourg division.[44]
It was reported on Monday morning, September 29, that Wachovia, the 4th largest bank in the United States, would be acquired by Citigroup.[45][46]
On Monday the German finance minister announced a rescue of Hypo Real Estate, a Munich-based holding company comprised of a number of real estate financing banks, but the deal collapsed on Saturday, October 4.
The same day the government of Iceland nationalized Glitnir, Iceland’s third largest lender.[47][48]
Stocks fell dramatically Monday in Europe and the US despite infusion of funds into the market for short term credit.[49][50] In the US the Dow dropped 777 points (6.98%), the largest one-day point-drop in history (but only the 17th largest percentage drop).[51]
The U.S. bailout plan, now named the Emergency Economic Stabilization Act of 2008 and expanded to 110 pages was slated for consideration in the House of Representatives on Monday, September 29 as HR 3997 and in the Senate later in the week.[52][53] The plan failed after the vote being held open for 40 minutes in the House of Representatives, 205 for the plan, 228 against.[54][55] Meanwhile US stock markets suffered steep declines, the Dow losing 300 points in a matter of minutes, ending down 777.68, the Nasdaq losing 199.61, falling below the 2000 point mark, and the S.&P. 500 off 8.77% for the day.[56] By the end of the day, the Dow suffered the largest drop in the history of the index.[57] The S&P 500 Banking Index fell 14% on September 29 with drops in the stock value of a number of US banks generally considered sound, including Bank of New York Mellon, State Street and Northern Trust; three Ohio banks, National City, Fifth Third, and KeyBank were down dramatically.[58][59]
On Tuesday, September 30, stocks rebounded but credit markets remained tight with the London Interbank Offered Rate (overnight dollar Libor) rising 4.7% to 6.88%.[60]
On Tuesday, September 30, 9 billion was made available by the French, Belgian and Luxembourg governments to the French-Belgian bank Dexia.[61]
After Irish banks came under pressure on Monday, September 29, the Irish government undertook a two year "guarantee arrangement to safeguard all deposits (retail, commercial, institutional and inter-bank), covered bonds, senior debt and dated subordinated debt (lower tier II)" of 6 Irish banks: Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and the EBS Building Society; the potential liability involved is about 400 billion dollars.[62]
The United States Senate's version of the $700 billion bailout plan, HR1424, modified to expand bank deposit guarantees to $250,000 and to include $100 billion in tax breaks for businesses and alternative energy, passed with bi-partisan support 74-25 on October 1st.[63] Reaction in the House was mixed,[64][65] but in a vote on Friday the House of Representatives passed the Emergency Economic Stabilization Act of 2008, as refashioned by the Senate, 263-171 in a bipartisan vote.[66]
Discussions were ongoing in Europe regarding possible remedies for financial instability in Europe leading up to a conference Saturday afternoon in Paris hosted by Nicolas Sarkozy, president of France. UniCredit of Italy was reported to be the latest bank to come under pressure.[67] During the night of October 2 Greece followed Ireland's lead and guaranteed all bank deposits.[68]
On October 3 it was reported that Wachovia had rejected the previous offer from Citigroup in favor of acquisition by Wells Fargo,[69] resulting in a legal dispute with Citigroup.[70]
In Britain, the Financial Services Authority announced on October 3 that effective Tuesday, October 7, the amount of the guarantee of bank deposits would be raised to £50,000 from £35,000.[71] On Friday, October 3, the government of the Netherlands took over the Dutch operations of Fortis, replacing the bailout plan of September 28.[72]
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.[17] 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.[18] On September 19 the U.S. Treasury offered temporary insurance (akin to FDIC insurance of bank accounts) to money market funds.[19] 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.[20] Similar measures were taken by authorities in other countries.[21] Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission[22][23]
[edit] Troubled Asset Relief Program
Main articles: Emergency Economic Stabilization Act of 2008 and Troubled Assets Relief Program
On September 19, 2008 a plan intended to ameliorate the difficulties caused by the subprime mortgage crisis was proposed by the Secretary of the Treasury, Henry Paulson. He proposed a Troubled Assets Relief Program (TARP), later incorporated into the Emergency Economic Stabilization Act, which would permit the United States government to purchase illiquid assets, informally termed toxic assets, from financial institutions.[24][25] The value of the securities is extremely difficult to determine.[26]
Consultations between the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the U.S. Securities and Exchange Commission, Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage-backed securities. At the close of the week the Secretary of the Treasury and President Bush announced a proposal for the federal government to buy up to US$700 billion of illiquid mortgage backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market. Details of the bailout remained to be acted upon by Congress.[27][28][29][30]
[edit] Week of September 21, 2008
On Sunday, September 21, the two remaining investment banks, Goldman Sachs and Morgan Stanley, with the approval of the Federal Reserve, converted to bank holding companies, a status subject to more regulation, but with readier access to capital.[31] On September 21, Treasury Secretary Henry Paulson announced that the original proposal, which would have excluded foreign banks, had been widened to include foreign financial institutions with a presence in the US. The US administration was pressuring other countries to set up similar bailout plans.[32]
On Monday and Tuesday during the week of September 22, appearances were made by the Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve before Congressional committees and on Wednesday a prime-time presidential address was delivered by the President of the United States on television. Behind the scenes, negotiations were held refining the proposal which had grown to 42 pages from its original 3 and was reported to include both an oversight structure and limitations on executive salaries, with other provisions under consideration.
On September 25, agreement was reported by congressional leaders on the basics of the package;[33] however, general and vocal opposition to the proposal was voiced by the public.[34] On Thursday afternoon at a White House meeting attended by congressional leaders and the presidential candidates, John McCain and Barack Obama, it became clear that there was no congressional consensus, with Republican representatives and the ranking member of the Senate Banking Committee, Richard C. Shelby, strongly opposing the proposal.[35] The alternative advanced by conservative House Republicans was to create a system of mortgage insurance funded by fees on those holding mortgages; as the working week ended, negotiations continued on the plan, which had grown to 102 pages and included mortgage insurance as an option.[36][37][38] On Thursday evening Washington Mutual, the nation's largest savings and loan, was seized by the Federal Deposit Insurance Corporation and most of its assets transferred to JPMorgan Chase.[39] Wachovia, one of the largest US banks, was reported to be in negotiations with Citigroup and other financial institutions.[40]
[edit] Week of September 28, 2008
Early into Sunday morning an announcement was made by the United States Secretary of the Treasury and congressional leaders that agreement had been reached on all major issues: the total amount of $700 billion remained with provision for the option of creating a scheme of mortgage insurance.[41]
It was reported on Sunday, September 28, that a rescue plan had been crafted for the British mortgage lender Bradford & Bingley.[42] Grupo Santander, the largest bank in Spain, was slated to take over the offices and savings accounts while the mortgage and loans business would be nationalized.[43]
Fortis, a huge Benelux banking and finance company was partially nationalized on September 28, 2008, with Belgium, the Netherlands and Luxembourg investing a total of €11.2 billion (US$16.3 billion) in the bank. Belgium will purchase 49% of Fortis's Belgian division, with the Netherlands doing the same for the Dutch division. Luxembourg has agreed to a loan convertible into a 49% share of Fortis's Luxembourg division.[44]
It was reported on Monday morning, September 29, that Wachovia, the 4th largest bank in the United States, would be acquired by Citigroup.[45][46]
On Monday the German finance minister announced a rescue of Hypo Real Estate, a Munich-based holding company comprised of a number of real estate financing banks, but the deal collapsed on Saturday, October 4.
The same day the government of Iceland nationalized Glitnir, Iceland’s third largest lender.[47][48]
Stocks fell dramatically Monday in Europe and the US despite infusion of funds into the market for short term credit.[49][50] In the US the Dow dropped 777 points (6.98%), the largest one-day point-drop in history (but only the 17th largest percentage drop).[51]
The U.S. bailout plan, now named the Emergency Economic Stabilization Act of 2008 and expanded to 110 pages was slated for consideration in the House of Representatives on Monday, September 29 as HR 3997 and in the Senate later in the week.[52][53] The plan failed after the vote being held open for 40 minutes in the House of Representatives, 205 for the plan, 228 against.[54][55] Meanwhile US stock markets suffered steep declines, the Dow losing 300 points in a matter of minutes, ending down 777.68, the Nasdaq losing 199.61, falling below the 2000 point mark, and the S.&P. 500 off 8.77% for the day.[56] By the end of the day, the Dow suffered the largest drop in the history of the index.[57] The S&P 500 Banking Index fell 14% on September 29 with drops in the stock value of a number of US banks generally considered sound, including Bank of New York Mellon, State Street and Northern Trust; three Ohio banks, National City, Fifth Third, and KeyBank were down dramatically.[58][59]
On Tuesday, September 30, stocks rebounded but credit markets remained tight with the London Interbank Offered Rate (overnight dollar Libor) rising 4.7% to 6.88%.[60]
On Tuesday, September 30, 9 billion was made available by the French, Belgian and Luxembourg governments to the French-Belgian bank Dexia.[61]
After Irish banks came under pressure on Monday, September 29, the Irish government undertook a two year "guarantee arrangement to safeguard all deposits (retail, commercial, institutional and inter-bank), covered bonds, senior debt and dated subordinated debt (lower tier II)" of 6 Irish banks: Allied Irish Banks, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and the EBS Building Society; the potential liability involved is about 400 billion dollars.[62]
The United States Senate's version of the $700 billion bailout plan, HR1424, modified to expand bank deposit guarantees to $250,000 and to include $100 billion in tax breaks for businesses and alternative energy, passed with bi-partisan support 74-25 on October 1st.[63] Reaction in the House was mixed,[64][65] but in a vote on Friday the House of Representatives passed the Emergency Economic Stabilization Act of 2008, as refashioned by the Senate, 263-171 in a bipartisan vote.[66]
Discussions were ongoing in Europe regarding possible remedies for financial instability in Europe leading up to a conference Saturday afternoon in Paris hosted by Nicolas Sarkozy, president of France. UniCredit of Italy was reported to be the latest bank to come under pressure.[67] During the night of October 2 Greece followed Ireland's lead and guaranteed all bank deposits.[68]
On October 3 it was reported that Wachovia had rejected the previous offer from Citigroup in favor of acquisition by Wells Fargo,[69] resulting in a legal dispute with Citigroup.[70]
In Britain, the Financial Services Authority announced on October 3 that effective Tuesday, October 7, the amount of the guarantee of bank deposits would be raised to £50,000 from £35,000.[71] On Friday, October 3, the government of the Netherlands took over the Dutch operations of Fortis, replacing the bailout plan of September 28.[72]
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