Randall Guynn Polk Davis Chapter report

Randall Guynn Polk Davis Chapter report - U NITED S TATES...

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Unformatted text preview: U NITED S TATES 25 United States Randall D Guynn, Davis Polk & Wardwell LLP This chapter discusses how the global financial panic of 2008 unfolded in the United States, the emergency measures taken to end it, and the financial regulatory reforms that have been enacted to reduce the likelihood or magnitude of future panics. The financial panic of 2008 The first signs of an impending financial crisis appeared in the US in 2007, when US real estate prices began to collapse and early delinquencies in recently underwritten sub-prime mortgages began to spike. It culminated in a genuine financial panic during September and October of 2008. The most serious recession since the Great Depression of the 1930s followed. The Federal Reserve and other organs of the US Government responded by flooding the markets with money and other liquidity, reducing interest rates, providing extraordinary assistance to major financial institutions, increasing Government spending, and taking other steps to provide financial assistance to the markets. When real estate prices began to collapse in the second half of 2007, some investors started shorting real estate markets. The leveraged credit market dried up and billions of dollars of pending buy-out deals collapsed. Billions more in mortgage-backed securities (MBS) and collateralised debt obligations (CDOs) were written down. Several CEOs of major US financial institutions lost their jobs. Others saved their jobs by obtaining capital infusions from sovereign wealth funds, hedge funds, private equity funds and other pools of risk capital. Real estate prices continued to collapse in early 2008, resulting in billions of dollars of additional CDO markdowns, the collapse and rescue of Bear Stearns, and extraordinary measures by the Federal Reserve to de-stigmatise the discount window for commercial banks and make emergency liquidity facilities available to the large investment banks. As the Federal Reserve responded to the crisis by reducing interest rates and flooding the market with money, the value of the dollar plummeted relative to other currencies. By the summer of 2008, the price of oil, agricultural products and other commodities – which are generally denominated in US dollars – soared almost in inverse proportion to any decline in the dollar. The interbank credit markets seized up. The market value of US financial institutions, 26 IBA T ASK F ORCE ON THE F INANCIAL C RISIS R EPORT : O CTOBER 2010 especially US mortgage giants Fannie Mae and Freddie Mac, 1 collapsed throughout the summer. The US Government was particularly concerned about Fannie Mae and Freddie Mac because of their size and importance to the US housing market. On 30 June 2008, these two institutions had combined liabilities of over US$5.5 trillion, on a combined total regulatory capital base of approximately US$100 billion. Moreover, a widespread perception existed that their obligations were backed by an implicit guarantee from the US Government. The US Treasury asked Congress for a blank guarantee from the US Government....
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Randall Guynn Polk Davis Chapter report - U NITED S TATES...

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