2008 Financial Crisis: Timeline of How It Started and Spread

How the Subprime Mortgage Bubble Formed

In the years leading up to the crisis, mortgage lenders in the United States started approving loans for subprime borrowers — people who would previously have struggled to qualify for a mortgage — according to a Federal Reserve essay on the subprime mortgage crisis. Those lenders did not keep the loans on their own books: they bundled them with others into securities, then sold those on to investors. This is the practice known as securitization, and most subprime mortgage funding ran through securities issued by private firms rather than public agencies.

Practical example: picture a hundred home loans made in a single year to different borrowers, some solid, some shakier. A lender that securitizes them doesn’t wait thirty years to get repaid: it packages them into a single security right away and sells it to an investment fund, collecting cash upfront. The fund, in turn, resells shares of that security to other investors. If one borrower stops paying, the loss is spread across many parties far removed from the original lender.

Rising mortgage demand pushed home prices higher, especially where housing supply was tight. The mechanism seized up once that growth slowed: in April 2007, New Century Financial Corp, one of the largest US subprime lenders, filed for bankruptcy. Over the rest of that year, many securitized bonds and the derivatives built on them saw their ratings cut to high-risk territory, and a number of subprime lenders closed their doors.

March 2008: The Bear Stearns Rescue

The first major banking shock came about a year later. On March 13, 2008, the investment bank Bear Stearns warned the Federal Reserve it might run out of sufficient liquidity as soon as the next day. The Federal Reserve, which acts as the central bank of the United States, authorized a $12.9 billion emergency loan on March 14, backed by assets valued at $13.8 billion and channeled through JPMorgan Chase. On March 16, Bear Stearns agreed to merge with JPMorgan Chase. To complete the deal, the Federal Reserve Bank of New York provided about $29 billion to a special-purpose vehicle, Maiden Lane LLC, which took on roughly $30 billion of the bank’s troubled assets.

September 2008: Lehman Brothers and the AIG Rescue

Six months after Bear Stearns, the crisis entered its most acute phase. Lehman Brothers formally filed for bankruptcy on September 15, 2008; on the eve of its collapse the bank still had $18.5 billion in outstanding loans from the Federal Reserve. The following day, September 16, the Federal Reserve Bank of New York extended credit to the insurer AIG, which held roughly $1 trillion in assets in mid-2008; in exchange for the rescue, the US Treasury received a 79.9% equity stake in AIG. After Lehman’s collapse, the Federal Reserve lent $28 billion through its primary dealer credit facility to contain the fallout across the rest of the system. In the following weeks, Citigroup and Bank of America also sought support from the Federal Reserve, the US Treasury and the FDIC.

The Public Response: TARP and Dodd-Frank

To stabilize the system, the US Treasury launched the Troubled Asset Relief Program, or TARP: Congress authorized up to $700 billion, but the Treasury ended up spending a much smaller share. The program’s total actual cost, once the books closed, came to about $31.1 billion, driven largely by foreclosure-prevention programs. As of September 30, 2023, the Treasury had disbursed a total of $443.5 billion through the TARP programs and had recovered $425.5 billion, reaching $443.1 billion once an additional $17.5 billion in proceeds from AIG shares is included: as of that date every TARP investment program was closed.

In 2010, Congress also passed the Dodd-Frank Act, introducing new supervisory rules for large financial institutions.

The Fallout on the Real Economy: GDP and Jobs

The financial crisis translated into a deep recession in the real economy. From peak to trough, US GDP fell 4.3%, making 2007-2009 the deepest recession since World War II. The US unemployment rate more than doubled over the same period, rising from under 5% to about 10% — a direct hit to the American labor market. The recession lasted 18 months, the longest of the postwar US recessions.

How the Global Economic Crisis Reached Europe

By 2008 the world economy was already crisscrossed by capital and credit flows that ran past national borders, one face of globalization: that was part of why the shock from American mortgages was eventually felt in Europe too, even if with a lag of a few years. The euro area’s aggregate budget balance moved from a position close to balance in 2000 to a deficit of about 6% of GDP in 2010, according to the European Central Bank; pushed far enough, that same dynamic feeds a country’s public debt.

From the middle of 2010, a vicious circle took hold between banks and public debt: banks held government bonds that were losing value, which in turn weakened their own balance sheets. The ECB intervened on several fronts. Between July 2009 and July 2010, the Eurosystem purchased €60 billion of covered bonds; in May 2010, faced with growing dysfunction in euro-area government bond markets, it launched the Securities Markets Programme to buy those bonds directly. On October 6, 2011, the ECB’s Governing Council decided on a second covered bond purchase program, worth €40 billion, to run from November 2011.

On the rules side, the EU’s economic governance framework had failed to prevent or correct the unsustainable national policies that fed the imbalances behind the sovereign debt crisis, then ECB Vice-President Vítor Constâncio has acknowledged. On September 28, 2011, the European Parliament approved new legislation known as the “six-pack”: four measures to strengthen the Stability and Growth Pact and budget surveillance, plus two more to monitor and address macroeconomic imbalances among EU countries.