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Financial Crisis - Sequence of Events February 2007...

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Sequence of Events February 2007 – Defaults in Subprime Mortgages, ratings agencies downgrade large number of mortgage backed security tranches. July 2007 – Market for short-term asset backed securities (which banks rely on to finance themselves) dried up. August 2007 – First illiquidity wave. Default and liquidity risks of banks rose. Banks unwilling to loan to each other.
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Sequence of Events, Cont. Problems with Carlyle decreased price of agency bonds. Bear Stearns investment bank/brokerage firm held large amounts of agency bonds and was a major creditor for Carlyle. Rumors that Bear Stearns was strapped for cash led to clients withdrawing from the firm. Bear Stearns was considered too interconnected to fail. Federal Reserve
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Sequence of Events, Cont Lehman Brothers did not issue new shares to strengthen its balance sheet, but instead relied on new access to Federal Reserve loans. In September 2008, Lehman’s share price declined and prospects for a buyout fell through because the government would not provide a guarantee. Lehman Brothers goes bankrupt. Merrill Lynch sold to Bank of America.
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