2008: Revolution of the Global Economy

November 26, 2008

(bettertrades) - Bear Stearns was the spark. Lehman Brothers was the fire. During a year when global wars and a historic election occurred, 2008 will forever be remembered for turning the financial system upside down.

The global economy was rocked in March of 2008, when Bear Stearns announced it could no longer survive on its own and would be purchased by JPMorgan. Failing financial institutions are not a new occurrence, but the rapidity in which confidence in Bear Stearns evaporated rattled Wall Street to its core. SEC Chairman Christopher Cox would later state that Bear's liquidity pool on March 10th was $18.1 billion and by March 13th it had plunged to $2 billion. Clearly, a crisis in confidence was brewing.

Like a prelude to the final act of a play, this summer's energy crisis provided a dramatic and devastating backdrop for the forthcoming storm of systemic risk. Oil soared over $147/bbl by July, and many analysts saw prices rising even further (Goldman Sachs forecasted $200/bbl).

On September 7, the FHFA (Federal Housing Finance Agency) announced the two most visible GSEs (Fannie Mae and Freddie Mac) were to be taken into conservatorship. One week later, Lehman Brothers announced its intention to file for bankruptcy after a potential acquisition by Barclays was not approved by European regulators. Merrill Lynch, sensing it could be next on the chopping block, then hastily put together a deal to sell itself to Bank of America. On September 16, American International Group was hit with a credit rating downgrade, causing a liquidity emergency, forcing the Federal Reserve to create an $85 billion credit facility to prop up the faltering insurer.

With confidence plummeting and roiling equity markets shedding billions in wealth by the day, on September 19th Treasury Secretary Paulson and Federal Reserve Chairman Bernanke put forth the Troubled Assets Relief Program, a $700 billion fund intended to take toxic assets off the books of beleaguered financial institutions.

During the week of September 21st, the last two investment banks, Goldman Sachs and Morgan Stanley, became bank holding companies. Despite subjecting themselves to greater regulation, the Wall Street investment banks' concerns regarding the lack of a reserve base prompted the switch to gain greater access to capital.

Later that week, JPMorgan Chase acquired most of the assets of Washington Mutual after the FDIC seized the failing savings and loan bank. Soon after, Wachovia entered into negotiations with Citigroup, and would later be forced to sell itself to Wells Fargo.

Frozen credit markets and broken confidence in the global financial system became staples during the economic crisis of 2008. Citigroup was rescued in November and the big three carmakers (General Motors, Ford, and Chrysler) would go to Congress in December, asking for billions in aid to prop up the ailing auto industry.

What began as an expected recession quickly turned into a tidal wave of global instability. Equity markets previously chugging along on route to all-time highs during the summer of 2007 were slammed when the housing and credit crisis hit the financial system like a meteor crashing into earth. According to marketwatch.com, the S&P 500 has shed $6.17 trillion in value since the October 2007 highs.

Global markets have been struck just as hard. Growth in the BRIC nations has come grinding to a halt, highlighted by Russian stocks plunging 72% and India dropping 67%, amongst other stark declines.

Wall Street is a different animal than it was just 5 months ago. Declining worldwide GDP and a strengthening dollar stopped oil in its tracks, plunging the price of crude near $40/bbl by year's end. Numerous hedge funds facing massive redemptions have closed their doors or have been fully liquidated. Treasurys are saturated with bids beyond any historical measure while equity markets are a daily rollercoaster. Regulation could be 2008's buzzword of the year. Ranging from banks' overexposure to leverage to the Madoff ponzi scheme scandal, global market participants have bawled over regulation, or lack thereof.

Will the wild ride continue? We'll soon find out.