Financial Deregulation

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Financial deregulation

Financial deregulation created an environment in which mortgage lending expanded and speculation in other financial markets were heightened. The result was, first, the failure of mortgage firms, banks and a major insurance company, followed by the collapse of the market for short term loans. This initially led to a liquidity crisis and then to insolvencies and a debt deflation and the whole economy sunk into a deep recession.
Financial deregulation prepared the conditions for the crisis through five different but closely related channels:
• Rapid expansion of financial innovations including complex financial derivatives and the accompanying excessive leverage
• Increased securitization;
• Emergence and expansion of
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Banks and hedge funds that invested big in subprime mortgages are left with worthless assets as foreclosures rise. The damage reaches the top echelons of Wall Street
- Feb. 27: Mortgage giant Freddie Mac says it will no longer buy the riskiest subprime loans.
- July 31: Investment bank Bear Stearns liquidates two hedge funds that invested in risky securities backed by subprime mortgage loans.
- Aug. 16: Fitch Ratings cuts the credit rating of giant mortgage lender Countrywide Financial to its third-lowest investment-grade rating.
2008: The U.S. economy is in recession. The crisis in subprime mortgages infects the credit markets.
- Jan. 11: Bank of America, the biggest U.S. bank by market value, agrees to buy Countrywide Financial for about $4 billion.
- March 16: The Federal Reserve agrees to guarantee $30 billion of Bear Stearns' assets about the government-sponsored sale of the investment bank to JPMorgan
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Bank of America agrees to purchase Merrill Lynch for $50 billion. Lehman Brothers files for bankruptcy-court protection. AIG, the world's largest insurer, accepts an $85 billion federal bailout that gives the government a 79.9% stake in the company. Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies subject to greater regulation by the Federal Reserve.
- Nov. 18: Ford, General Motors and Chrysler executives testify before Congress, requesting federal loans from Troubled Asset Relief Program or TARP.
- Nov. 23: The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. agree to rescue Citigroup with a package of guarantees, funding access and capital. Citigroup will issue preferred shares to the Treasury and FDIC in exchange for protection against losses on a $306 billion pool of commercial and residential securities it holds.
- Dec. 19: The U.S. Treasury authorizes loans of up to $13.4 billion for General Motors and $4.0 billion for Chrysler from

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