Government intervention during the subprime mortgage crisis


The government interventions during the subprime mortgage crisis were a response to the 2007–2009 subprime mortgage crisis and resulted in a variety of government bailouts that were implemented to stabilize the financial system during late 2007 and early 2008.
Governments intervened in the United States and United Kingdom and several other Western European countries, such as Belgium, France, Germany, Ireland, Luxembourg, and the Netherlands. In addition, global reform of the banking industry has been discussed to reduce speculation. Measures include a supertax on bankers' bonuses and a financial transaction tax.

Summary

Northern Rock

had difficulty finding finance to keep the business going and approached the Bank of England as lender of the last resort on the 12 September 2007. This caused mass concern about the bank's future. The Bank of England and the UK Government both insisted that the bank was secure and would not collapse. However this failed to stop thousands of customers withdrawing around £1billion from their savings. Northern Rock's share price plummeted and intense pressure from the media, political opposition parties and customers of Northern Rock, forced the Government to nationalize it on 17 February 2008.

Bank rescue package

Banks that are short of capital can ask to be rescued. The government has used tax payer's money to buy shares in the banks, making them part nationalised. Banks who take the rescue packages may have restrictions on executive pay and dividends to existing shareholders.

Bonus Supertax

In December 2009, the United Kingdom announced a supertax on banking bonuses, in order to reduce the risk of further crises in the banking sector.

United States

Bear Stearns

On March 16, 2008, J.P. Morgan Chase announced that it would buy Bear Stearns for $500 million or $2 a share; those same shares a year earlier were trading at around $150. Later, on March 24, 2008 J.P. Morgan Chase increased the offer to $1.2 billion or $10 a share and five days later the acquisition was approved. In order for the deal to go through J.P. Morgan Chase required the Fed to issue a nonrecourse loan of $29 billion to Bear Stearns. This means that the loan is collateralized by mortgage debt and that the government can't go after J.P. Morgan Chase's assets if the mortgage debt collateral becomes insufficient to repay the loan.
The bailout was taken in part to avoid a potential fire sale of nearly U.S. $210 billion of Bear Stearns' MBS and other assets, which could have caused further devaluation in similar securities across the banking system. Chairman of the Fed, Ben Bernanke, defended the bailout by stating that a Bear Stearns' bankruptcy would have affected the real economy and could have caused a "chaotic unwinding" of investments across the US markets.

Independent National Mortgage Corporation (IndyMac)

Before its failure, the Independent National Mortgage Corporation
was the largest savings and loan association in the Los Angeles area and the seventh largest mortgage originator in the United States.
The failure of IndyMac Bank on July 11, 2008, was the fourth largest bank failure in United States history, and the second largest failure of a regulated thrift. IndyMac Bank's parent corporation was IndyMac Bancorp until the FDIC seized IndyMac Bank.

Fannie Mae and Freddie Mac

The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, two large government-sponsored enterprises, are the two largest single mortgage backing entities in the United States. Between the two corporations, they back nearly half of the $12 trillion mortgages outstanding as of 2008. During the mortgage crises, some in the investment community feared the corporations would run out of capital. Both corporations insisted that they were financially solid, with sufficient capital to continue their businesses, but stock prices in both corporations dropped steadily nonetheless.
Given their size and key role in the US housing market, it had long been speculated that the US Government would take action to bolster both companies in such a situation. On 30 July 2008, this speculation became reality when President Bush signed the Housing and Economic Recovery Act of 2008. While analysts disagreed on the financial need for such a bailout, the investor confidence provided by an explicit government show of support was likely needed in any case.
On 5 September 2008, the Treasury Department confirmed that both Fannie Mae and Freddie Mac would be placed into conservatorship with the government taking over management of the pair.

Lehman Brothers, Merrill Lynch & Co. and AIG

Lehman Brothers and Merrill Lynch

On September 15, 2008, a day which has been dubbed Meltdown Monday by some News outlets, the 94-year-old Merrill Lynch agreed to be acquired by Bank of America for $50 billion. Also on that day Lehman Brothers, facing a refusal by the federal government to bail it out, filed for Chapter 11 bankruptcy protection. Treasury Secretary Hank Paulson cited moral hazard as a reason for not bailing out Lehman Brothers.

American International Group

On September 16, 2008, the Federal Reserve Bank of New York bailed out insurance giant AIG by providing an emergency credit liquidity facility of up to $85 billion, which will be repaid by selling off assets of the company.
After assessing that a disorderly failure of AIG could worsen the current financial and economic crisis,
and at the request of AIG, the Federal Reserve Bank of New York intervened. The Federal Reserve required a 79.9 percent equity stake as a fee for service and to compensate for the risk of the loan to AIG.

Washington Mutual

The Seattle-based bank holding company Washington Mutual declared bankruptcy on September 26, 2008. The 120-year-old company, one of the largest banking institutions in the US West, was driven into bankruptcy by the subprime crises. On the previous day, September 25, 2008, the United States Office of Thrift Supervision announced that it closed the holding company's primary operating subsidiary, Washington Mutual Savings Bank, and had placed it into the receivership of the Federal Deposit Insurance Corporation. The FDIC sold the assets, all deposit accounts, and secured liabilities to JPMorgan Chase, but not unsecured debt or equity obligations.
Washington Mutual Savings Bank's closure and receivership is the largest U.S. bank failure in history.
Kerry Killinger, the CEO from 1988 to August 2008, had been fired by the board of directors. Virtually all savings and checking account holders were not affected as the accounts were insured by the FDIC during the collapse, and subsequently transferred in whole to JPMorgan Chase. The holding company, Washington Mutual Inc was left without its major asset and equity investment, its former subsidiary Washington Mutual Savings Bank, and filed for bankruptcy the following day, the 26th.
WaMu's collapse is the largest U.S. bank failure in history.

Wachovia

, the fourth biggest US bank by assets, agreed on September 29, 2008 to divest all of its banking subsidiaries to CitiGroup in an all-stock transaction, scheduled to be consummated by December 31, 2008. The transaction "open bank" was facilitated by the FDIC and with the concurrence of the United States Department of the Treasury, and the Board of Governors of the Federal Reserve Bank. The FDIC guaranteed to Citigroup to cover any losses on the Wachovia banking portfolio greater than $42 billion, in exchange for $10 billion in preferred stock.
However, Wachovia was eventually sold to Wells Fargo without government assistance, voiding the Citibank deal.

Troubled Asset Relief Program

The Troubled Asset Relief Program is a program of the United States government to purchase toxic assets and equity from financial institutions to strengthen its financial sector that was passed by Congress and signed into law by President George W. Bush on October 3, 2008. It was a component of the government's measures in 2008 to address the subprime mortgage crisis.
The TARP originally authorized expenditures of $700 billion. The Emergency Economic Stabilization Act of 2008 created the TARP. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, reduced the amount authorized to $475 billion. By October 11, 2012, the Congressional Budget Office stated that total disbursements would be $431 billion, and estimated the total cost, including grants for mortgage programs that have not yet been made, would be $24 billion.
On December 19, 2014, the U.S. Treasury sold its remaining holdings of Ally Financial, essentially ending the program.