The financial crisis started in 2007 and still in progress in 2010 is a financial crisis marked by a crisis in interbank liquidity and credit crunch. Launched in July 2007, it finds its origins in the bursting of bubbles price (including U.S. real estate bubble of the 2000s) and losses of financial institutions caused by the subprime crisis.

Accented in September 2008 by a fall in the prices of stock markets and the collapse of several financial institutions, it causes an early systemic crisis and an overall recession in the world. The public finances have been heavily used to resolve this crisis. The deficit widened in many countries, after a decline in gross domestic product of 2.2% worldwide in 2009.

The United States under pressure from public opinion and experts like Paul Volcker, considering structural reform of the financial sector to avoid a similar crisis from happening again. Meanwhile, in some countries such as China, bank loans surged. Also, in early 2010, the influx of cash raises fears outbreak of new real estate bubble in Chinese stock markets, bonds and metals States.

Timeline

Subprime Crisis

The subprime crisis erupted in the second half of 2006 with the crash of real estate loans (mortgages) at risk in the U.S. (the subprime), which borrowers, often in modest circumstances, were no longer able to repay. Unveiled in February 2007 by announcing major provisions passed by the bank HSBC, it turned into open crisis when the periodic auctions have not been sold in July 2007. Given the current accounting rules, it became impossible to value these securities that have been provisioned to a value close to zero. At the same time, the owners could no longer redeem their debt. Distrust claims moved to securitized (ABS, RMBS, CMBS, CDO) that include a greater or lesser credit subprime and to investment funds, the mutual funds (including money market mutual funds) and the system Bank likely to hold these credit derivatives.

Financial Crisis of 2008

The second phase of the financial crisis began during the week of 14 September 2008 when several financial institutions U.S. come insolvent, and are either saved in extremis by the U.S. Federal Reserve (Fed) (the insurance company AIG by example), or bought by competitors in a better situation, or put into liquidation (Lehman Brothers). The crisis is affecting all countries, particularly in Europe where many financial institutions are experiencing serious difficulties and are saved by the intervention of states and central banks (European Central Bank in the euro area). Some mark the beginning of the crisis by the nationalization of Freddie Mac and Fannie Mae on 6 September 2008.

The cyclical reasons

The financial crisis that began in 2007 is mainly originated from the monetary policy too accommodative Federal Reserve (Fed) during the 2000s under the term of Alan Greenspan and poorly understood financial innovations. Among the politicians who helped direct the conditions of this crisis through economic and social, the Guardian cites Bill Clinton a note, George W. Bush, Gordon Brown, as well as in the field of finance, the former CEO and current insurance company American International Group, banks Goldman Sachs, Lehman Brothers, Merrill Lynch, Halifax Bank of Scotland, Royal Bank of Scotland, Bradford & Bingley, Northern Rock, Bear Stearns, Bank of England and personalities like the financier George Soros, billionaire Warren Buffett and the president of a U.S. investment fund John Paulson7.

During the recession that followed the bursting of the dot.com bubble in 2000-2001, the Fed lowered its key rate to 1%, then maintained at a level too low, causing money supply too much and swelling of bubbles in housing markets (U.S. housing bubble of the 2000s) and on raw materials. In addition, the U.S. government has implemented a policy of home ownership has encouraged banks to make loans to household actually insolvent, in particular the Community Reinvestment Act. The semi-state agencies Freddie Mac and Fannie Mae were strongly encouraged to reduce their selection criteria for mortgages.

In 2006, the Fed, at the beginning of the mandate of Ben Bernanke, has increased its rate by 1% to 5% in order to reduce inflationary pressures growing. This increase in interest rates caused a bursting of the U.S. housing bubble of the 2000sand led to more expensive monthly repayments of housing loans (loans are often variable-rate). Many [How?] households have stopped repaying their credit and have left their property, seized and sold by the credit institutions, leading to an increased supply in the housing market, and thus doing lower price. Because of falling prices, the institutions can only partially recover the amount loaned. The effects of a deflating housing bubble are generally limited to personal bankruptcies and reduced losses for financial institutions. The crisis of 2007-2008 is different because the mortgage lenders did not keep the mortgages to their balance sheets, but were pooled in investment vehicles, mortgage funds, among others for resale to pension funds and major U.S. banks. Mortgage funds losing value with the end of the housing bubble, and, most importantly, the complexity and intricacy of investment vehicles make it very difficult to estimate their value, the balance sheet of financial institutions was worse, that the because of accounting standards , mark to market, have significantly accrue asset impairments. This led to a contagion effect and a general loss of confidence among financial institutions, which has dried the interbank market (liquidity crisis). Financial institutions, especially investment banks, have been weakened.

The structural reasons

On the one hand, the years prior to the crisis has been a proliferation of financial innovations that led to a market of “680 000 billion dollars” bit or not regulated, also called “shadow market “. These financial innovations aimed at reducing risks and have taken particular form of ” derivatives “of which two were at the heart of the financial crisis: “the products linked to mortgages and products to insure against the risk of default the credit default swaps . “

Moreover, rising profits and lower the weight of wages caused a “misalignment between supply and demand”9. In particular the U.S., loans “subprime “prompted some of the people to consume beyond its means, which in turn allowed ensuring the profitability of real estate. Income inequality has become very strong: “The pay gap between CEOs and employees United States of 1-40 in 1980, went from 1-411 in 2005″, the creation of wealth has been captured essentially a small portion of the population at the expense of economic efficiency.

Crisis in financial sector

Liquidity crisis

The uncertainties on the direct and indirect obligations of financial institutions on credit risk but also the fear of a general slowdown in banking finance and investment, highly profitable and drive growth over the previous year , ended up causing a real crisis of confidence, having experienced little precedent among banks. They saw their main sources dry up refinancing, the interbank market and the issuance of ABCP ((in) asset-backed commercial paper).

On the interbank market, on which banks in surplus capital lend to those who lack it, the distrust between banks has itself led to a surge in interbank rates.

Moreover, the banks had put in place during previous years of funding structures, called SIV or conduit ((in) structured investment vehicles) that issued commercial paper Short-term rates low ((in) asset-backed commercial paper) sold to investors. The funds raised were then loaned to long-term rates higher, which allowed a margin of interest. But these short-term loans to be renewed regularly (every three months). However, once the crisis of confidence in the banks involved, investors have stopped funding the ABCP, forcing banks to fund themselves.

The liquidity crisis has prompted central banks, European Central Bank (ECB) and Federal Reserve USA (Fed) first, to make massive injections of liquidity on the interbank market to allow institutions to refinance their activity and to avoid triggering a systemic crisis (crisis of the whole system). The first operation took place August 9, 2007, when the ECB has injected 94.8 billion of Euros in the European financial system to increase liquidity in the market lacked. It is the largest provision of funds made in one day by the ECB, exceeding the loan of 69.3 billion Euros done after the attacks of September 11, 2001. The same day, the Fed injected 24 billion dollars in the financial system of his country.

Banks have traditionally funded by borrowing on the money market interbank maturities of three months. The interest rate at which they borrow (in continental Europe, this is the Euribor for three months) is usually higher than 15-20 basis points (0.15 to 0.20% in common parlance) at the rate director of the central bank is considered risk-free rate15. The difference between the rate at which banks borrow and the rate is called risk premium (or spread in English) and is calculated by the index TED (in) for the U.S. case. From the confidence crisis of August 2007, the rate Euribor soared, reaching 4.95% in December 2007 when the rate was 4% (2007) and in normal times, they have borrowed to 4.20%. In October 2008, the index TED has even reached the historical level of 4% difference when it was 0.5% on average 2004-2007.

The liquidity crisis is reinforced by the information asymmetry between banks, which are therefore reluctant to lend to each other.

Impact on bank accounts

The Australian bank Macquarie, U.S. Bear Stearns, British HSBC and German IKB were among the first affected. Bear Stearns, in particular, possessed of hedge funds that had bet on a rebound in the property sector for the recovery of funds lent by banks. The bank has been weakened from the outset by the failure of two of its hedge funds.

A banking panic, limited to the British bank Northern Rock, took place in September 2007. In three days, the bank’s customers withdrew 12% of the amounts deposited.

Major global banks have announced results of the third and fourth quarters of 2007 fell sharply following the crisis due to both:

• Direct losses on subprime loans;
• but above impairments subprime derivatives (the value of financial assets like RMBS, CDOs included in the accounts established in their market value fell sharply during the quarter);
• A sharp slowdown in investment banking and market that had been engines of profit from previous years (securitization, financing of LBOs and hedge funds, mergers and acquisitions, asset management, etc…).

Major U.S. investment banks and European experienced significant impairments in the third quarter 2007:

1. Goldman Sachs: $ 1.5 billion.
2. Bear Stearns: $ 0.7 billion.
3. Lehman Brothers: $ 0.7 billion.
4. Morgan Stanley: $ 1.5 billion.
5. Merrill Lynch: $ 8.4 billion.
6. Citigroup: $ 5.9 billion21.
7. UBS 11 billion Swiss francs21.
8. Credit Suisse: 2.5 billion Swiss francs.
9. Deutsche Bank: 2.2 billion Euros.

Other important asset impairments have been placed in the fourth quarter 2007 and first quarter 2008.

The actual cost of the crisis for banks (impairment of assets under fair value accounting and risk provisions linked to the crisis) is estimated at:

• 110 billion dollars in November 2007,
• 188 billion in March 2008,
• 250 billion in April 2008,
• 400 billion in June 2008.

Estimates of the overall cost of the crisis on banks (and impairment losses) have been continuously revised upwards during the crisis:

• 250 billion dollars according to Bear Stearns28 and Lehman Brothers29 to November 7, 2007,
• 300-400000000000 dollars according to Deutsche Bank in November 2007, which 150-250000000000 directly linked to subprime loans and 150 billion in derivatives backed by these loans,
• 500 billion dollars according to Royal Bank of Scotland in November 2007.
• $ 422 billion (268 billion Euros) worldwide, according to an estimate of the OECD in April 2008. Its previous estimate was 300 billion.
• 565 billion (358 billion Euros) for the single exposure of banks to industry, subprime, but $ 945 billion (600 billion Euros) for the total cost of the financial crisis, according to an estimate of the IMF April 2008 in33 which will revise that figure around 1.5 trillion dollars October 7, 200834, 2200 billion 28 January 200935and 4000 billion 21 April 2009.

The difficulties and failures of financial institutions

United States

On 16 March 2008, Stearns Bear, at the edge of bankruptcy, was bought for $ 1.2 billion by JPMorgan Chase, with the support of the Federal Reserve.

Fannie Mae and Freddie Mac, two agencies that provide mortgage refinancing nearly 40% of U.S. mortgage (that is 5300 billion dollars), were placed under protection by the U.S. Treasury on 7 September 2008. It is nationalization in fact, an exceptional event for listed companies in the United States.

On September 15th 2008, the investment bank Lehman Brothers’ (59 billion U.S. $ turnover) is bankrupt.

The FDIC maintains a list of all financial institution that went bankrupt since 2000, the year. The years 2008 and 2009 were particularly disastrous and more than a hundred schools have had to cease their activities.

In Europe

In September 2007, UBS and Credit Suisse (reduction of 1,500 persons) are affected by the crisis in the U.S. mortgage market.

Britain’s Northern Rock, bank specializing in mortgage, is nationalized on 18 February 2008.

On 14 July 2008, the Spanish bank Banco Santander, bought Britain’s Alliance & Leicester for 1.3 billion pounds.

On 31 August 2008, Germany’s Dresdner Bank is sold by the insurer Allianz to his compatriot Commerzbank for 9.8 billion Euros.

The Dutch government Balkenende nationalized the 4 October 2008 the group Fortis Netherlands, which includes bank ABN Amro Dutch.

Insurers World International Nederland Group (ING), mainly responsible for pensions in Chile, has lost 68.7% in one year before being partially nationalized by the Dutch government, which was recapitalized in October 2008 with over 10 billion Euros. Met life and Principal Financial Group (in), also very active in Chile, also lost more than 50% of their value.

Impact on international financial markets

Average level of Dow Jones Industrial, between January 2006 and November 2008.

Financial markets, which had undergone an initial crisis of confidence in February-March 2007, before recovering in early summer, reaching their highest annual level in mid-July. They drop from the July 18 notice (the collapse of two hedge funds of Bear Stearns); a movement accentuated August 9 with the announcement of the freezing of three funds monetary dynamics of BNP Paribas Investment Partners, a subsidiary of BNP Paribas. In August 2007, Oddo Asset Management froze several investment funds of its network and February 2008, AXA Investment Managers suspends three investment funds to its network.

Falling prices increases with the financial crisis of autumn 2008. The week of October 6 to 10, 2008 will be remembered as one of the worst weeks as global stock markets have known. The CAC 40 was indeed not lost nearly 1,000 points, or about 20%.

Between 1st January 2008 and October 24, 2008, the CAC 40 index down 43.11%, the DAX (Germany) 46.75%, the FTSE 100 (United Kingdom) to 39.86%, the Nikkei (Japan) of 50.03% and the Dow Jones (U.S.) to 36.83%48.

The crisis has effects on other markets, such as the raw materials. According to analyst John Kilduff, “it’s a contagion effect: what is happening in the markets and capital grants has caused liquidity to dry up, forcing many players such as hedge funds to leave the energy market and to liquidate their positions”

Strengthening the crisis in autumn 2008

Between September and October 2008 the financial crisis is growing strongly, especially with the bankruptcy of Lehman Brothers. Stock markets fell sharply.

Rescuing the financial sector and the new regulation

The threat of bankruptcy of the banking system, which supports the economy, has pushed the government to intervene in different countries through three main methods:

• The idea of confinement of dangerous assets, recovery of what had already been put in place during the crisis of U.S. savings and loan in the late 1980s. This is the principle of origin of the Paulson plan.
• The State guarantee for loans used to refinance the balance sheets of banks50. This is the answer to it liquidity markets refinancing banks.
• The recapitalization of banks by the States, in response to fears of solvency or at least non-compliance with solvency requirements embodied in the tier one ratio. This action initiated by the British government Gordon Brown and repeated in the wake by the great European.

These actions were interpreted as strengthening the efforts of States in the financial system after thirty years of decline in the role of the state. Some interpretations have welcomed the end of liberalism or, as in the stock market crash of 1987, the bankruptcy of capitalism. Other interpretations see a return to Keynesianism.

Critics of economic liberalism in the context of the crisis based primarily upon:

Lack of regulation in key markets of the crisis, such as those of the origination of mortgage loans in the United States or those of CDOs (collateralized debt obligation).

Creativity and the growing complexity of financial activities, including attacks by the explosion of salaries in bonuses that drove him to take ever greater risks.

Proponents of economic liberalism, while recognizing the valuable role of the state last resort in cases of crisis systematically refute this analysis.

They argue first that the crisis was not caused by an excess of liberalism but actually by the free market distortions caused by the state, including the expansionary monetary policy by Fed Chairman Alan Greenspan during the years 2002-2006, the source of the debt bubble, and the obligation to lend to the poorest households imposed by the U.S. state banks, because of the granting of credits subprime. Thus, according to economist Florin Aftalion:

“Under the influence of the law called the Community Reinvestment Act, banks have had to choose between giving up their development or do very risky loans to disadvantaged communities.”

Similarly, Aftalion believes that the securitization of these receivables in MBS was performed “with the encouragement of Congress”.

Second point: Liberals, the international financial system failed to meet the more true principles of liberalism. The French columnist Nicolas Baverez judge thus:

“Capitalism (…) is a mode of production based on the entrepreneurship and the remuneration of risk. In its global form, including finance was the spearhead, departing from these principles by disconnecting the profit and earnings performance and actual risks. “

Finally, liberals argue for a short intervention of the state, leaving market forces to play as soon as it would be possible again.

Some economists even Keynesians worry that excessive action of States. Thus, the French economist Alain Lipietz, the regulation school, explains: “The risk facing the slowdown is the stimulus at all-is.” Similarly, the French economist Michel Aglietta also states: “I fear we will go to the club in terms of regulation.” According to Le Monde, “the frightened interventionist Keynesian especially as it endorses the idea of disgraced privatizing profits and socializing losses.”

Resistance testing and the new regulation

In early May, the results of resistance tests for the crisis to review the status of U.S. banks and their ability to cope with conditions55 showed that they needed 74, 6 billion dollars. It was rather comforted markets and banks in general will feel able56 to raise its funds without going through the U.S. government (they continue nonetheless to benefit from refinancing rate very low by the Fed). Some observers are concerned about the attitude of bankers who seem to want to return to practice before the crisis57. All this pushes the Treasury Secretary Timothy Geithner to want to regulate the derivatives market “while the memory is still acute damage.

President Barack Obama sign on 20 May 2009 The Helping Families Save Their Homes Act of 2009 (in) and Fraud Enforcement and Recovery Act of 2009 (in), including establishing a commission of inquiry, the Inquiry Commission Financial Crisis (by) directed by Phil Angelides (in) and to investigate the causes and responsibilities of the crisis. The Commission has a budget of $ 8 million. In June 2009, the Obama administration appoints a supervisor to monitor the salaries of banking executives who received public funds twice60. Furthermore, it is envisaged that the regulator’s ability to change pay systems if they are likely to generate incentives dangerous for the stability of financial institutions.

In Europe, the governor of the Bank of France, Christian Noyer, European banks that would also be subjected to tests of resistance. Indeed, he disputed the figures of IMF that assessed the funding needs of European banks to 600 billion dollars. Such tests would allow European central banks to see clearer. Beginning in June 2009, eight French and German economist Peter Bofinger, Christian de Boissieu, Daniel Cohen, Jean Pisani-Ferry, Wolfgang Franz, Christoph Schmidt, Beatrice Weder di Mauro, Wolfgang Wiegard, demanding real “stress test” because they feel European urgent need to know “the true state of health of the European banking system.

Moreover, financial supervision at EU level is under review by the European Commission based on this fact on the report of Jacques de Larosiere. However, the UK seems very reluctant to the idea of “being ultimately dictate its conduct by a European authority.

Impacts on other economic sectors

The financial crisis affects the economy particularly through the low morale of households and heads of companies, difficulties faced by banks, the tightening of credit (rising interest rates, greater selectivity borrowers). These factors are weighing on consumption of households and the investment companies, causing a sharp reduction in growth. The economic crisis of 2008, to which other factors have contributed, results in a recession the United States from December 2007.

To reduce these negative consequences, the Federal Reserve of the United States has declined progressively rates. The Tuesday, September 18, 2007 it drops a half point its main policy rate, reduced from 5.25% to 4.75%64. It is the largest drop since November 2002, when the crisis of confidence in the case Enron.

Plans to revive the economy have been committed in November and December 2008. In Chile and Argentina, the respective governments of Bachelet and Cristina Kirchner were taken to reform the system of pensions, previously based on the pension funds, heavily affected by the crisis.

In the euro area, the Irish, the United Kingdom, the Italian, the Spanish (who supported a half-time in Europe of redundancies due to the crisis), then the German came in recession66. The United States went into recession in December 2007, with a sharp deterioration in October 2008. The France is in recession May 15, 200867.

The situation in 2010

The liquidity injected by central banks to alleviate the crisis has been provided in part to the real economy, but also to the speculation. Thus, the bubbles68 threaten to erupt on scholarships, loans to States, sugar etc…

However, experts are divided. For example, while the IMF believes that China is threatened by glut of credit, the World Bank thinks the opposite.

Bonus and pension credit

For Jean-Marc Vittori, several signs (“employees paid more than elsewhere, the Secretary to the Chief; outlandish bonuses, profit above average”) show the existence of rents (i.e. profits above the average related to dysfunctional market) in the banking and finance. If in September 2009, this reporter wondered about the origin of annuities, recent studies are beginning to provide some answers.

In a recent study by IMF, economists have emphasized that these are financial institutions that have invested most in lobbying between 2000 and 2006 who had expressed the most risky loans. Moreover, according to Helene Rey financial institutions have invested 126 million dollars during the first nine months of 2009 “in shaping a financial system regulation that protects their annuities.

Where a pension, two main alternatives are possible opposite. Or we can try to delete it by changing laws, but rather the position of Paul Volcker, or the State or international institutions may try to appropriate part through taxes, but rather position of Lord Turner, the chairman of the Financial Services Authority in London.

The beginning of a reform of the financial system in the United States

On January 21, 2010, Barack Obama and his advisor Paul Volcker propose measures in a way to update the Glass-Steagall Act of 1933, repealed in 1999. Remember that this law was issued after the 1929 crisis in order to prevent commercial banks do not play the markets with the money of depositors. Also, investment banks and deposit should they be separate. Besides this, nowadays, the “too big to fail “is also problematic. Hence it describes the fact that large banks knew that anyway governments save them for their failures outweigh the global financial system may be tempted to take too many risks. Finally, the United States, public opinion is “exasperated by bonuses on Wall Street and their huge profits,” even though he had to save them during the 2008 financial crisis. Also, the proposed reform has three components:

• Limiting the size of assets;
• Prohibition for banks to speculate on their own account;
• Ban on commercial banks owning or financing of hedge funds.

Martin Wolf while approving the will of Paul Volcker to “develop a financial system that serves to support the real economy rather than making huge profits in high risk activities to destabilize” these solutions is both impractical and inappropriate for what should be done. Dani Rodrik Professor of Economics at the Harvard opposes criticism of Martin Wolf felt that this regulation is inapplicable outside the United States. For this university:

The diversity of rules governing the financial sector would not be bad for countries or groups of countries with the opportunity to tell banks “if you want to serve my market, you have to play by my rules. On a more general, for the author, “we suffer from a surfeit of financial globalization, and not the contrary”

The global rules are “regulations weak and ineffective” where bankers can assert their interests. So, for him, “the politicization is necessary antidote against the tendency to be technocratic under the influence of banks. He believes that “democratic accountability is our only protection against a return to a light regulatory touch.