A Look Back at the US Financial Crisis: 2007

It is important to look back on critical moments of history. For example who among us doesn't remember this iconic moment in 21st century pop culture:

No one? Maybe that is just my millennial webmaster. 2012 marks the five year anniversary since the start of the US Financial Crisis. I found this great timeline by the St. Louis Federal Reserve. So I decided to look back on some of my writings from critical times in the crisis throughout 2007 (we'll examine later years in subsequent posts). In short, sometimes I was right and sometimes I was wrong.

On Febuary 27th, The Federal Home Loan Mortgage Corporation (Freddie Mac) announces that it will no longer buy the most risky subprime mortgages and mortgage-related securities. Three days later on March 2nd I look at the theme managing risk in Jack Bauer, Risk-Aversity, and the Dollar.

On March 20th in Make it or Break it I state Thus far the actual evidence of the sub-prime problem spreading or becoming more generalized has been very light. This remains in the realm of conjecture and anxiety than reality, but needs to be monitored.

Less thank two weeks later on April 2nd, New Century Financial Corporation, a leading subprime mortgage lender, files for Chapter 11 bankruptcy protection.

On May 7th in Why the Fed is Right and the Market Wrong I examine the market view that the US consumer and government lives beyond it means. The savings rate is abysmal. Some people who could not really afford homes managed to purchase them. Woops, I guess we should file this one under "obvious foreshadowing".

On June 1st Standard and Poor’s and Moody’s Investor Services downgrade over 100 bonds backed by second-line subprime mortgages. Less than a week later on June 7th Bear Stearns informs investors that it is suspending redemptions from its High-Grade Structured Credit Strategies Enhanced Leverage Fund. The next day, June 8th, I comment in Is the End Nigh? that many have now recognized that far from slipping into a recession, the world’s biggest economy is accelerating. Okay I can admit it, I was wrong there too.

On July 11th Standard and Poor’s places 612 securities backed by subprime residential mortgages on a credit watch. Two days later on July 13th in The Word is Resilience I say The sub-prime woes remain a potential threat to overall credit conditions and to the overall health of the economy.

On July 31st Bear Stearns liquidates two hedge funds that invested in various types of mortgage-backed securities. A week later on August 6th American Home Mortgage Investment Corporation files for Chapter 11 bankruptcy protection and the next day on August 7th the FOMC voted to maintain its target for the federal funds rate at 5.25 percent.

However just three days later on August 10th in an unscheduled meeting the Fed announces that it “will provide reserves as necessary…to promote trading in the federal funds market at rates close to the FOMC target rate of 5.25 percent." A week later on August 17th at another unscheduled meeting they reduce the primary credit rate by 50bp and increases the maximum primary credit borrowing term to 30 days. I discuss both later that day in Moral Hazard on Main Street and Wall Street.

On August 24th in a piece entitled (In) Securitization I state Some 3.2 mln US households acquired homes through sub-prime and ninja loans (no documentation of income, job or assets) that were later sold and packaged and taken apart and re-packaged. Moodyseconomy.com estimates that some 1.7 mln households may lose their homes. This is a tragedy indeed, but that means that 1.5 mln households will now be home owners that otherwise would still be renters.

On September 7th, after nonfarm payrolls unexpectedly declines I state a 25 bp cut now would be disappointing. The Fed needs to get ahead of the proverbial curve in The Rubicon is Crossed. The Fed must have paid attention because at the September 18th FOMC meeting they cut rates by a larger than expected 50bp.

Three days later on September 21st I say the US dollar’s slide is once again prompting a steady drum beat warning that the end is nigh in Making Cents of the Dollar.

In an October 19th piece Look out Below: Dollar Losses Accelerating I make a case for further dollar declines and note that the dollar rate of 4.75% was likely to come down, closing in on the euro rate of 4.0%. Less than two weeks later on October 31st the Fed slashed another 25bp.

On November 2nd in How Appropriate is Central Bank Policy on I discuss a risk that the Fed cuts rates in December and say the risk is the US economy slows below 2.0% in Q4 but that the economy stabilizes in Q1 ‘08. Well at least I was right about the Fed, as they cut rates by 25bp on December 11th.

The next day, December 12th, the Fed announces the creation of a Term Auction Facility (TAF) for fixed amounts of term funds to be auctioned to depository institutions against a wide variety of collateral. At the same time the FOMC authorizes temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB) and the Fed states  it will provide up to $24 billion to the ECB and SNB for up to 6 months. Later that week on December 14th I examine all of this in A More Sanguine View as the Dust Settles.

Stay tuned because next week we are going to look at how the US Financial Crisis and my views evolved in 2008.