Global Financial Crisis (2008)
The Global Financial Crisis of 2008 was the most severe financial collapse since the Great Depression, triggered by the implosion of the US subprime mortgage market and the subsequent failure of interconnected financial institutions worldwide.
The Global Financial Crisis of 2008 traced its roots to years of aggressive mortgage lending to borrowers with weak credit histories — so-called subprime loans — that were then packaged into complex securities and sold to investors globally. Rating agencies assigned high credit ratings to tranches of these mortgage-backed securities that were far riskier than the ratings implied. Banks, hedge funds, and insurance companies around the world accumulated enormous exposures to US housing.
When US home prices peaked in 2006 and began declining, delinquency rates on subprime mortgages rose sharply. The value of mortgage-backed securities collapsed. Bear Stearns, one of the largest investment banks on Wall Street, saw two of its hedge funds fail in the summer of 2007, providing an early warning that the crisis was spreading beyond subprime originators. In March 2008, Bear Stearns itself had to be rescued by JPMorgan Chase with Federal Reserve backing.
The defining moment came on September 15, 2008, when Lehman Brothers — a 158-year-old investment bank — filed for bankruptcy. It was the largest bankruptcy in US history. The immediate effect was a freezing of interbank lending as financial institutions became uncertain about their counterparties' solvency. Money market funds, considered among the safest instruments in finance, 'broke the buck' — meaning their net asset values fell below $1 — as they held Lehman commercial paper. A run on the broader money market system threatened to halt the commercial paper market that corporations used to fund daily operations.
The US government responded with the $700 billion Troubled Asset Relief Program (TARP), which authorized the Treasury to purchase toxic assets and inject capital directly into banks. The Federal Reserve slashed interest rates to near zero and deployed unprecedented emergency lending programs. Similar interventions occurred in the UK, Europe, and elsewhere.
From its peak in October 2007 to its trough in March 2009, the S&P 500 fell approximately 57%. The crisis wiped out trillions in household wealth, triggered a global recession, and reshaped the regulatory landscape for finance — producing the Dodd-Frank Act in the US and new international capital standards under Basel III.