Financial Crisis Timeline

¶This Report reviews events from the period 2004 to 2008, in an effort to identify and explain four significant causes of the financial crisis. A variety of events could be identified as the start of the crisis. Candidates include the record number of home loan defaults that began in December 2006; the FDIC's March 2007 cease and desist order against Fremont Investment & Loan which exposed the existence of unsafe and unsound subprime lending practices; or the collapse of the Bear Stearns hedge funds in June 2007. Still another candidate is the two-week period in September 2008, when half a dozen major U.S. financial institutions failed, were forcibly sold, or were bailed out by U.S. taxpayers seeking to prevent a collapse of the U.S. economy.

¶This Report concludes, however, that the most immediate trigger to the financial crisis was the July 2007 decision by Moody's and S&P to downgrade hundreds of RMBS and CDO securities. The firms took this action because, in the words of one S&P senior analyst, the investment grade ratings could not "hold." By acknowledging that RMBS and CDO securities containing high risk, poor quality mortgages were not safe investments and were going to incur losses, the credit rating agencies admitted the emperor had no clothes. Investors stopped buying, the value of the RMBS and CDO securities fell, and financial institutions around the world were suddenly left with unmarketable securities whose value was plummeting. The financial crisis was on.

¶Because of the complex nature of the financial crisis, this chapter concludes with a brief timeline of some key events from 2006 through 2008. The succeeding chapters provide more detailed examinations of the roles of high risk lending, federal regulators, credit ratings agencies, and investment banks in causing the financial crisis.

¶Financial Crisis Timeline 104

December 2006: March 24, 2008: Ownit Mortgage Solutions bankruptcy Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns February 27, 2007: Freddie Mac announces it will no longer buy the May 29, 2008: most risky subprime mortgages Bear Stearns shareholders approve sale March 7, 2007: July 11, 2008: FDIC issues cease and desist order against Fremont IndyMac Bank fails and is seized by FDIC for unsafe and unsound banking July 15, 2008: April 2, 2007: SEC restricts naked short selling of some financial New Century bankruptcy stocks June 17, 2007: September 7, 2008: Two Bear Stearns subprime hedge funds collapse U.S. takes control of Fannie Mae and Freddie Mac July 10 and 12, 2007: September 15, 2008: Credit rating agencies issue first mass ratings Lehman Brothers bankruptcy downgrades of hundreds of RMBS and CDO securities September 15,²⁰⁰⁸²⁰⁰⁸ SEC Examination Report for Moody's Investor Services Inc., PSI-SEC (Moodys Exam Report)-14-0001- 16, at 4. SEC Examination Report for Standard and Poor's Ratings Services, Inc., PSI-SEC (S&P Exam Report)- 14-0001-24, at 3. For a detailed discussion of these obligations under federal securities laws, see Section (6)(a), below. Merrill Lynch announces its sale to Bank of America August 6, 2007: American Home Mortgage bankruptcy September 16, 2008: Federal Reserve offers $85 billion credit line to AIG; August 17, 2007: Reserve Primary Money Fund NAV falls below $1 Federal Reserve: "[M]arket conditions have deteriorated … downside risks to growth have September 21, 2008: increased appreciably." Goldman Sachs and Morgan Stanley convert to bank holding companies August 31, 2007: Ameriquest Mortgage ceases operations September 25, 2008: WaMu fails, is seized by FDIC, and is sold to December 12, 2007: JPMorgan Chase Federal Reserve establishes Term Auction Facility to provide bank funding October 3, 2008: Congress and President Bush establish TARP January 2008: ABX Index stops issuing new subprime indices October 12, 2008: Wachovia is sold to Wells Fargo January 11, 2008: Countrywide announces sale to Bank of America October 28, 2008: U.S. uses TARP to buy $125 billion in preferred January 30, 2008: stock at nine banks S&P downgrades or places on credit watch over 8,000 RMBS and CDO securities November 25, 2008: Federal Reserve buys Fannie and Freddie assets

¶III. HIGH RISK LENDING: