Banking crises

Many banks, over the years, have suffered a sudden rush of withdrawals by depositors which economists call a bank run. Since banks lend out most of the cash they receive in deposits, it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is often called a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch.

Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 is also sometimes called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. The U.S. savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990-1991.

Speculative bubbles and crashes

Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the value of the future income (such as interest or dividends) that would be received by owning it to maturity. If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.

Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s and the crash of the [dot-com bubble] in 2000-2001.

International financial crises

When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows.

Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The Russian financial crisis of 1998 resulted in a devaluation of the ruble and default on Russian government debt.

Wider economic crises

A downturn in economic growth lasting several quarters or more is usually called a recession. An especially prolonged recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation. Since these phenomena affect much more than the financial system, they are not usually considered financial crises per se. But some economists have argued that many recessions have been caused in large part by financial crises. One important example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the world is widely expected to lead to recession in the U.S. and a number of other countries in 2008.

Nonetheless, some economists argue that financial crises are caused by recessions instead of the other way around. Also, even if a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Friedman and Schwartz argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 1930s could not have turned into a prolonged depression without reinforcement by monetary policy mistakes on the part of the Federal Reserve.

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Video: Progressives on financial markets crisis

Strategic complementarities in financial markets

It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. George Soros has called this need to guess the intentions of others 'reflexivity'. Similarly, John Maynard Keynes compared financial markets to a beauty contest game in which each participant tries to predict which model other participants will consider most beautiful.

Furthermore, in many cases investors have incentives to coordinate their choices. For example, someone who thinks other investors want to buy lots of Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen too. Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw too. Economists call an incentive to mimic the strategies of others strategic complementarity.

It has been argued that if people or firms have a sufficiently strong incentive to do the same thing they expect others to do, then self-fulfilling prophecies may occur. For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail. Therefore, financial crises are sometimes viewed as a vicious circle in which investors shun some institution or asset because they expect others to do so.

Leverage

Leverage, which means borrowing to finance investments, is frequently cited as a contributor to financial crises. When a financial institution (or an individual) invests its own money, it can, in the very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another.

The average degree of leverage in the economy often rises prior to a financial crisis. For example, borrowing to finance investment in the stock market ("margin buying") became increasingly common prior to the Wall Street Crash of 1929.

Asset-liability mismatch

Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution's debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reason bank runs occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans). Likewise, Bear Stearns failed in 2007-08 because it was unable to renew the short-term debt it used to finance long-term investments in mortgage securities.

In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run a risk of sovereign default due to fluctuations in exchange rates.

Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency: making institutions' financial situation publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements, capital requirements, and other limits on leverage.

Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the Managing Director of the IMF, Dominique Strauss-Kahn, has blamed the financial crisis of 2008 on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'. Likewise, the New York Times singled out the deregulation of credit default swaps as a cause of the crisis.

However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis.

Fraud

Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled the resulting income. Examples include Charles Ponzi's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, and the scams that led to the Albanian Lottery Uprising of 1997.

Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008 subprime mortgage crisis; government officials stated on Sept. 23, 2008 that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group.

Contagion

Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.

One widely-cited example of contagion was the spread of the Thai crisis in 1997 to other countries like South Korea. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

Recessionary effects

Some financial crises have little effect outside of the financial sector, like the Wall Street crash of 1987, but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. These theoretical ideas include the 'financial accelerator', 'flight to quality' and 'flight to liquidity', and the Kiyotaki-Moore model. Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions.

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Video: Roubini: Severe Recession Train Has Left the Station

Hyman Minsky has proposed a simplified explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three types of financing firms choose according to their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility.

Financial fragility levels move together with the business cycle. After a recession, firms have lost much financing and choose only hedge, the safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore, they are ready to lend to firms without full guarantees of success. Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: What Led to the Financial Crisis?

The Financial Collapse of 2007–2008, generally referred to in Britain as "the credit crunch" and in the United States as "the credit crisis," first became apparent on August 9, 2007 when a loss of confidence by investors in the value of securitized mortgages resulted in a liquidity crisis which prompted the massive injection of capital into financial markets by the Federal Reserve and the European Central Bank. The TED spread over the period from August, 2007 to the present clearly shows increases dating from that time with a spike in September, 2008. The TED spread is an indicator of perceived credit risk in the general economy.

Predictions

A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse.

Timeline of events

Events of 2007

• Liquidity crisis emerges August 9, 2007

Events of 2008

January 2008 stock market volatility
Bear Stearns
Federal takeover of Fannie Mae and Freddie Mac
Liquidity crisis of September 2008
American International Group
Merrill Lynch
Lehman Brothers
Economic crisis of 2008
Washington Mutual, sold by FDIC to JPMorgan Chase
Wachovia's banking assests (of $700B) sold to Citigroup for $2.2B
U.S. legislative proposals are made to provide economic rescue
Hypo Real Estate

Links and further reading

• "Congress decides it is worth risking depression Commentary by Martin Wolf in The Financial Times Published: September 30 2008 19:22 | Last updated: September 30 2008 19:22
• "Bailout Plan Is Only One Step on a Long Road" news analysis by Steve Lohr in The New York Times September 28, 2008
• Text and summary of the Emergency Economic Stabilization Act of 2008
• "Wall Street, R.I.P.: The End of an Era, Even at Goldman" article by Julie Creswell and Ben White in The New York Times September 27, 2008
• "Five Days That Transformed Wall Street". The Washington Post.
• Ben S. Bernanke (September 23, 2008). "Text of the testimony prepared for delivery before the Senate Committee on Banking, Housing, and Urban Affairs". The New York Times.
• Henry M. Paulson, Jr. (September 23, 2008). "Text of the testimony prepared for delivery before the Senate Committee on Banking, Housing, and Urban Affairs". The New York Times.
• Nocera, Joe; Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews (2008-10-01). "36 Hours of Alarm and Action as Crisis Spiraled", New York Times. Retrieved on 2008-10-02.  (Background on development of the Treasury proposal to Congress)
• "The Day the S.E.C. Changed the Game" Report by Stephen Labaton Produced by Amy O'Leary in The New York Times: September 28 2008

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: Inside Story - Financial crisis and Europe

The 2008 Russian financial crisis is an ongoing crisis on Russian markets, as nervousness over the global banking crisis has been compounded by political fears after the war with Georgia, as well as renewed concern about state intervention in corporations of strategic interests. Russia's economy is also heavily dependent on energy prices, especially oil which has lost more than a third of its value since its record peak of USD 147 on July 11, 2008.

Russia is a major exporter of commodities such as oil and metals, its equity market has been hit hard by the decline in the price of many commodities. In addition, investors have pulled billions of dollars out of Russia on concerns over escalating geopolitical tensions with the West following the military conflict between Georgia and Russia, as well as concerns about state interference in the economy. Those concerns were underscored in July by Prime Minister Vladimir Putin's criticism of steel company Mechel which wiped out billions of dollars of its market capitalization. By September 2008, the RTS stock index plunged almost 54%, making it one of the worst performing markets in the world. Compounding the volatile situation in Russia's financial system has been also involvement in the US subprime mortgage crisis with the Russian Central Bank owning US$100 Billion of mortgage-backed securities in the two American mortgage giants Fannie Mae and Freddie Mac that were taken over by the US government that most likely will have to be written off

Swedish Foreign minister Carl Bildt said on September 17 that the current Russian financial crisis is "obviously more worrying" than the ongoing subprime mortgage crisis in view of the political development in Russia.

References

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2. "OIL PRICES BELOW 100 USD, GAS PRICE STILL THE SAME", www.worldbulletin.net, Turkey (2008-09-10).
3. Financial turmoil accelerates in Russia, MarketWatch, September 17, 2008.
4. Delasantellis, Julian (2008-09-09). "Paulson placates China, Russia - for now", Asia Times Online.
5. Kramer, Andrew E (July 26, 2008). "Putin’s Criticism Puts a $6 Billion Hole in a Company", The New York Times.
6. Stewart, Catrina (July 28, 2008). "Putin blasts steel firm Mechel for tax evasion", BusinessWeek.
7. Lesova, Polya (July 28, 2008). "Fresh criticism by Putin sends Mechel shares tumbling again", MarketWatch.
8. Russian stocks suspended in worst plunge since 1998, Reuters, September 16, 2008.
9. Russian markets suspended again after shares plummet, The Times, September 17, 2008.
10. Russian Exchanges Halt Trading for Second Day; VTB Declines, Bloomberg, September 17, 2008.
11. Russian Exchanges Halt Trading for Second Day; VTB Declines, Bloomberg, September 17, 2008.
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This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: Russia's financial crisis, Sept 17 08

American lawmakers proposed an initial bill for a United States financial system bailout. This measure, which involved the government acquiring or insuring as much as $700 billion of troubled mortgage-backed securities, was intended to reduce uncertainty regarding these assets and restore confidence in the credit markets. The bill was rejected by the United States House of Representatives on September 29th by a 228 to 205 margin.

Following several financial crises among major financial U.S. financial institutions in September 2008, including the federal takeover of Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, an emergency Federal Reserve loan to American International Group, and the January purchase of Countrywide Financial and merger of Merrill Lynch into Bank of America—events considered part of the on-going financial crisis of 2007–2008—the United States Secretary of the Treasury Henry Paulson proposed a plan under which the U.S. Treasury would be authorized to acquire mortgage backed securities that are backed by troubled housing loans, with the outstanding balance of acquired assets not to exceed $700 Billion at any time. The plan was immediately backed by President George W. Bush and negotiations began with leaders in the United States Congress to draft appropriate legislation. Proponents of the plan argue that the urgent, dramatic intervention called for by the plan is vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to a significant downturn in the economy. Opponents object to the massive cost of the plan and point to polls that show little support among the public for bailing out Wall Street investment banks.

References

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8. Andrews, Edmund L. "Bush Officials Urge Swift Action on Rescue Powers", The New York Times September 19, 2008.
9. "Rescue Plan Seeks $700 Billion to Buy Bad Mortgages" article by The Associated Press in The New York Times September 20, 2008
10. Herszenhorn, David M. "Administration Is Seeking $700 Billion for Wall Street", The New York Times, September 20, 2008.
11. Bailout plan not embraced, Top officials push for speed in passing bailout package but many are skeptical - Nomi Prins at The Real News, September 24, 2008
12. Schwartz, Nelson D.; Carter Dougherty (2008-09-22). "Foreign Banks Hope Bailout Will Be Global", The New York Times. 
13. President's Address to the Nation, September 24, 2008.
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16. "Rescue Plan Seeks $700 Billion to Buy Bad Mortgages" article by The Associated Press in The New York Times September 20, 2008
17. Thompson, Mark. 7 Questions About the $700 Billion Bailout, Time, September 24, 2008.
18. Rose-Barney Frank Interview
19. Luhby, Tami. Congress Advances on Bailout Deal, CNNMoney.com, September 24, 2008.
20. Keoun, Bradley. "Merrill Sells $8.55 Billion of Stock, Unloads CDOs", Bloomberg.com, July 29, 2008.
21. Christie, Les. "Housing relief efforts slow as pace of foreclosures rise", CNNMoney.com, April 28, 2008.
22. Bull, Alister. "Fed says to make loans to aid money market funds"
23. Gullapalli, Diya and Anand, Shefali. "Bailout of Money Funds Seems to Stanch Outflow", The Wall Street Journal, September 20, 2008.
24. (Press Release) FRB: Board Approves Two Interim Final Rules
25. Beck, Rachel (2008-09-23). "Transparency key to bailout successs", Associated Press.
26. HOME (Home Owners’ Mortgage Enterprise): A 10 Step Plan to Resolve the Financial Crisis
27. http://dealbook.blogs.nytimes.com/2008/09/26/former-merrill-banker-suggests-bailout-alternative/
28. http://www.reuters.com/article/newsOne/idUSTRE48O7QB20080925
29. http://news.yahoo.com/s/nm/20080925/pl_nm/us_financial_bailout_republicans_group_polit
30. Sunnucks, Mike. "McCain may back alternative to bank bailout", Phoenix Business Journal, September 25, 2008.
31. http://blogs.denverpost.com/eletters/2008/09/27/financial-crisis-and-bailout-9-letters-2/
32. (Press Release) Testimony by Secretary Henry M. Paulson, Jr. before the Senate Banking Committee, United States Department of the Treasury, September 23, 2008.
33. Chairman Ben S. Bernanke Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
34. Bad News For The Bailoutt, Forbes.com, 09 September 2008
35. Cramer views
36. Vekshin, Alison. "Paulson, Lawmakers Narrowing Differences, Frank Says"
37. Rowley, James and Alison Vekshin "House Republicans Undercut Bush on Rescue, Slow Talks"
38. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/26/MNOO1367MD.DTL&type=politicss
39. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/09/26/MNOO1367MD.DTL&type=politics
40. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/10/cccrisis110.xml
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43. "Fact Sheet: Questions and Answers on Conservatorship", Federal Housing Finance Agency (2008-09-07).
44. Goldfarb, Zachary A.; David Cho and Binyamin Appelbaum (2008-09-07). "Treasury to Rescue Fannie and Freddie: Regulators Seek to Keep Firms' Troubles From Setting Off Wave of Bank Failures", Washington Post, pp. A01.
45. http://www.reuters.com/article/vcCandidateFeed2/idUSTRE48Q3GG20080927?pageNumber=2&virtualBrandChannel=10112
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47. Michigan Libertarians for Congress Unanimous: ‘Don’t bail out the bankers, throw out the incumbents’’", Independent Political Report.
48. Twaronite, Lisa and Levine, Deborah. "Dollar buckles under bailout's fiscal weight", MarketWatch, September 22, 2008.
49. "Dollar slips vs yen and euro, U.S. plan in focus"
50. Jacobs, Stevenson. "Oil makes biggest single-day price jump ever", Yahoo! Finance, September 22, 2008.
51. Shenk, Mark. "Oil Posts Biggest Gain as Traders Caught in End-Month Squeeze", Bloomberg.com, September 22, 2008.
52. Hoak, Amy. "Mortgage rates jump in wake of bailout plan", MarketWatch, September 25, 2008.
53. "How Much The Government's $700B Bailout Plan Will Cost You", Associated Press and NBC6.net, September 26, 2008.
54. Once in a century rip-off, Economist Michael Hudson: The bailout is a giveaway that will cause hyperinflation and dollar collapse. - The Real News, September 26, 2008
55. http://www.dailynewscaster.com/2008/09/26/bush-bailout-will-cause-hyperinflation/
56. http://www.naturalnews.com/024341.html
57. WSJ
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60. Shenn, Jody. "Paulson Debt Plan May Benefit Mostly Goldman, Morgan", Bloomberg.com, September 22, 2008.
61. Transparency key to bailout successs", Associated Press.
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64. Goodman, Peter S. Experts See a Need for Punitive Action in Bailout, The New York Times, September 22, 2008.
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66. "Bailout talks in disarray", CNN Money.com Sept. 25, 2008
67. Draft of House bill to be voted on Monday, September 29, 2008
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74. Labor unions protest in New York against bailoutt". Reuters.
75. "Public isn't buying Wall Street bailout", Los Angeles Times, September 26, 2008.
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81. Newport, Frank. "Americans Favor Congressional Action on Crisis", The Gallup Organization, September 26, 2008.
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90. Jagger, Suzy. "Henry Paulson hailed as a hero for stemming market slide, but all are not convinced", The Times, September 20, 2008.
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• Free market bailed out, 700 billion dollar Wall St bailout by Bush administration; 35 years of neo-liberalism crashes - Ron Blackwell and Ellen Frank at The Real News, September 22, 2008

Links

• Text of original Paulson proposal
• Jobs and Economic Growth - a discussion of the proposal from the White House.
• Agreed-upon draft of House Resolution for the bailout (110 pages)
• Chart comparing Paulson plan, Frank–Dodd plan, and compromise plan for bailout
• Text version of House Res 1517 Bailout Bill

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: 700 billion bailout

;

The FDIC's satellite headquarters campus in Arlington is home to many administrative and support functions, though the most important officials work at the main building in Washington

Twelve United States banks have failed as of September 5, 2008, after only three failures in 2007 and none in 2006 or 2005. United States regulatory agencies close a bank when its capital levels are too low, or it cannot meet obligations the next day. IndyMac Bank was the second or third largest bank failure in United States history. William Isaac, former chairman of the Federal Deposit Insurance Corporation, predicts there will be "more failed banks this year.” Early in 2008, the FDIC, anticipating a string of bank failures in 2008, began hiring retirees from its division of resolutions and receiverships.

In late August, the FDIC reported that its list of 'problem banks' has risen to 117 banks, and it might have to ask the U.S. Treasury Department for more funds to cover an anticipated wave of new bank failures.

List of bank failures in 2008

1. Douglass National Bank, Kansas City, MO. Failed on January 25, 2008
2. Hume Bank, Hume, MO. Failed on March 7, 2008
3. ANB Financial, NA, Bentonville, AR. Failed on May 9, 2008
4. First Integrity Bank, NA, Staples, MN. Failed on May 30, 2008
5. IndyMac Bank, Pasadena, CA. Failed on July 11, 2008
6. First National Bank of Nevada, Reno, NV. Failed on July 25, 2008
7. First Heritage Bank, NA, Newport Beach, CA. Failed on July 25, 2008
8. First Priority Bank, Bradenton, FL. Failed on August 1, 2008
9. The Columbian Bank and Trust Company, Topeka, KS. Failed on August 22, 2008
10. Integrity Bancshares Inc., Alpharetta, GA. Failed on August 29, 2008
11. Silver State Bank, Henderson, NV. Failed on September 5, 2008
12. Ameribank, Northfork, WV. Failed on September 19, 2008

References

1. "Failed Bank List". Federal Deposit Insurance Corporation. United States Government.
2. Robertson Jr., Austin G. (2008-08-04). "Do you know where your bank is?", Shreveport Times.
3. Kristof, Kathy M.; Chang, Andrea (2008-07-12). "IndyMac Bank seized by federal regulators". Los Angeles Times.
4. Paletta, Damian; Enrich, David (2008-07-12). "Crisis Deepens as Big Bank Fails: IndyMac Seized In Largest Bust In Two Decades". Wall Street Journal.
5. Story, Louise (2008-14-07). "Analysts Say More Banks Will Fail", New York Times.
6. Paletta, Damian (2008-26-02). "FDIC to Add Staff as Bank Failures Loom", Wall Street Journal.
7. "European stocks fall on bank fears; oil rises", International Herald Tribune (2008-08-27).

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Video: Wall Street Faces Trying Day Ahead

A bank run (also known as a run on the bank) occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent. As a bank run progresses, it generates its own momentum, in a kind of self-fulfilling prophecy: as more people withdraw their deposits, the likelihood of default increases, and this encourages further withdrawals. This can destabilize the bank to the point where it faces bankruptcy.

A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time. A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out. The resulting chain of bankruptcies can cause a long economic recession. Much of the Great Depression's economic damage was caused directly by bank runs. The cost of cleaning up a systemic banking crisis can be huge, with fiscal costs averaging 13% of GDP and economic output losses averaging 20% of GDP for important crises from 1970 to 2007.

Several techniques can help to prevent bank runs. They include temporary suspension of withdrawals, the organization of central banks that act as a lender of last resort, the protection of deposit insurance systems such as the U.S. Federal Deposit Insurance Corporation, and governmental bank regulation. These techniques do not always work: for example, even with deposit insurance, depositors may still be motivated by beliefs they may lack immediate access to deposits during a bank reorganization.

Examples of systemic banking crises

Panic of 1907
Great Depression
US savings and loan crisis of 1980s-1990s
Swedish banking crisis (1990s)
Argentine economic crisis (1999-2002)
US subprime mortgage crisis of 2008

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Video: BANK RUN

The global financial crisis of September–October 2008 is a major ongoing financial crisis, the worst of its kind since the Great Depression. It became prominantly visible in mid-September, 2008 with the failure, merger or conservatorship of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. investment banks, insurance firms and mortgage banks.

Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global crisis resulting in a number of European bank failures and reductions in stock indexes, and value of equities (stock) and commodities worldwide. The crisis has lead to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liqudity crisis. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change. The crisis has roots in the subprime mortgage crisis and is an acute phase of the financial crisis of 2007–2008.

Links

• "How This Bear Market Compares" Multimedia The New York Times
• RGE Monitor
• Commercial Paper Rates and Outstanding (Federal Reserve Bank)

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Video: Global Financial Rescue (European leaders are banking on a plan to give a boost to struggling financial institutions on a global scale.)

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism, a market where Price to Earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.

There is no numerically specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable crashes.

Further reading

• Galbraith, John K. The Great Crash. Mariner Books, New York. ISBN 0-395-85999-9.
• Kindleberger, Charles P. 2000, Manias, Panics, and Crashes: A History of Financial Crises. Wiley & Sons, New York, NY. ISBN 0-471-38945-5.
• Shiller, Robert J. 2001, Irrational Exuberance. Broadway, New York, NY. ISBN 0-7679-0718-3.
• Didier Sornette, Why Stock Markets Crash. Princeton University Press. ISBN 0691-09630-9

References

1. Preliminary Observations on the October 1987 Crash, United States General Accounting Office (GAO). January 1988. GAO/GGD-88-38. p.14, p.36
2. U.S. GAO op. cit. p.55
3. Critical Market Crashes, D. Sornette. p.6
4. U.S. GAO op. cit. p.37
5. What caused the Stock Market Crash of 1987?
6. Stock trade patterns could predict financial earthquakes - MIT News Office
7. Mandelbrot, B. (1963) ”The variation of certain speculative prices” Journal of Business, XXXVI, 392-417
8. Mantegna, R.N., and Stanley, E. 1995. Scaling behaviour in the dynamics of an economic index. Nature 376(July 6):46.

Links

• Stock Market Crash Calculator
• Every Generation has its Crash
• Log-periodic power law bubbles in Latin-American and Asian markets and correlated anti-bubbles in Western stock markets: An empirical study.Anders, Sornette. International Journal of Theoretical and Applied Finance 4(6), 853-920(2001).
• A theory of power-law distributions in financial market fluctuations. Gabaix, Gopikrishnan, Pierou, Stanley. Nature, vol 423. 15 May 2003.

This guide is licensed under the GNU Free Documentation License. It uses material from the Wikipedia.

Video: Stock Market Crashes October 2008! Are You Making or Losing $$?