©Professor Sameer Kulkarni

Mumbai-India
Contact- kulkamkt@gmail.com
January,2001 Interest rates Begin to Fall-In the aftermath of the Bursting of the
technology bubble in 2001, The Federal Reserve lowers its benchmark
interest rate to 1 %, from 6.5 % over two years. The strong foreign
demand for American securities pushes down long term interest rates.

Year-2002 Wall Street tries to Disperse Risks-Wall street packages more

mortgages and other consumer debt into securities for investors
like pension funds, foreign central banks and hedge funds.
Bankers asserts that, these instruments – mortgage backed
securities and collateralized debt obligations-will help reduce and
disperse risks.

Home prices raise sharply in the quarter- Lower borrowing costs

October-2002
and advent of more risky loans helps drive up home prices,
which nearly double from 2000 to 2006. The run up is greatest in
California, Florida, Arizona and Nevada.
Jun,2006 Risky Loans peak in the quarter- Encouraged by low rates & securitization,
banks and mortgage companies take bigger risks in home lending by
allowing homeowners to borrow more, put little or no money down & not
provide proof of their financial conditions.

Jan-2007 Prices Begin to fall Sharply in the quarter- With interest rates rising and
home ownership at record levels, prices start to dip in the second half of
2006. The decline started in places like San Diego., where the prices
jumped the most during the boom.

New Century Entered into Bankruptcy- New Century Financial ,

April 2,-2007 one of the nation’s biggest subprime mortgage lenders , seeks
bankruptcy protection. The company’s failure focuses the
nation’s attention on the rise in mortgage defaults. The S.&P. 500
closes at 1,424.55 up 0.26%
2007 Defaults increase sharply in the second half of the year- As more
homeowners are unable to refinance or sell their depreciating homes ,
defaults on mortgage s climb. The first signs of trouble emerge among
subprime loans but they quickly move to supposedly better quality loans.

Jun 22-2007 Bear Stearns Moves to Rescue Fund- Bear stearn pledges up to $ 3.2
billion in loans to bail out one of its hedge funds that was collapsing
because of bad bets on subprime mortgages. It is the biggest rescue of
the hedge fund since 1998. when more than one dozen lenders provided
$ 3.6 billion to cover long term capital management. Despite the efforts
the fund latter collapses. The S.&P. 500 closes at 1,502.56, down 1.23%.

Credit Crises- With defaults rising and real estate prices falling,
Aug-2007
the value of mortgage securities falls rapidly and investors leave
the market. Bank take more than $ 500 billion in write downs and
the IMF estimates losses could top $ 1 trillion.
Aug.9,2007 Intervention- BNP Paribas, a French bank suspends three funds
because of exposure to U.S. mortgages. The European Central bank
and the Federal Reserve intervene by lending money to banks. The
S.& P. 500 closes at 1.453.09 down 2.96%

Aug 16-2007 No Credit for Countrywide – Countrywide Financial, the largest

mortgage lender in the U.S. , draws down $ 11.5 billion from its
credit lines because it can no longer sell or borrow against the home
loans it has made. The S.&P. 500 closes at 1,411.27, up 0.33%

Sept,14, 2007 British Bailout- Northern Rock, a big British mortgage lender,
turns to the Bank of England for an emergency loan because it is
unable to raise financing in the tight credit market. The bailout is
the latest indication the turmoil that began in the subprime
market in the United States has expanded into other areas. The
S.&P. 500 closes at 1,484.25, up 0.02%
Sept.18,2007 The Fed begins to cut- Hoping to restore claim in the markets, the
Federal Reserves begins to cutting the bench mark interest rate with a
half point cut. Over the next eight months, The Fed funds rate falls to
2 %, The S.& P. 500 closes at 1.519.78 up 2.92%

Oct 9-2007 A Defiant Optimism- Even as conditions continue to deteriorate ,

investors in the stock market are optimistic and send the S.& P. 500
up 0.81% to a new high of 1,565.15

Oct,30, 2007 O’Neal Departs- E. Stanley O’Neal , the head of Merrill Lynch,
resigns after an $ 8.4 billion write down and an un authorized
merger approach to a rival bank. The S.&P.500 closes at 1,531.02,
down 0.65%.
Nov15,2007 Prince Resigns- The embattled chief executive of Citigroup , Charles
O. Prince-III , steps down in the wake of a $ 5.9 billion write down
and sharp drop in profit. The S.&P.500 closes at 1,502.17, down
0.50%.

Dec 6-2007 Sovereign Wealth Funds- The Abu Dhabi Investment Authority
makes a $ 7.5 billion investment in Citigroup. The move is the latest
action taken by the company to bolster its capital base, which has
dwindled to unusually low levels after a spate of acquisition and
recent credit market turmoil , the following day the S.&P.500 closes
at 1,428.23, up 1.49%.

Dec 6, 2007 A Dent in European Growth – facing the prospect of both rising
inflation and subsiding economic growth , the Bank of England
opts to take actions, cutting its bench mark rate for the first time
in two years, by a quarter –point, to 5.5 %. The Bank said the
credit squeeze in the US curtailed loans for households &
Businesses, denting Britain’s growth prospects. The S.&P.500
closes at 1,507.34, up 1.50%.
Nov15,2007 Prince Resigns- The embattled chief executive of Citigroup , Charles
O. Prince-III , steps down in the wake of a $ 5.9 billion write down
and sharp drop in profit. The S.&P.500 closes at 1,502.17, down
0.50%.

Dec 6-2007 Sovereign Wealth Funds- The Abu Dhabi Investment Authority
makes a $ 7.5 billion investment in Citigroup. The move is the latest
action taken by the company to bolster its capital base, which has
dwindled to unusually low levels after a spate of acquisition and
recent credit market turmoil , the following day the S.&P.500 closes
at 1,428.23, up 1.49%.

2007 Leverage Peaks- Across the financial system , banks, securities

firm and hedge funds increase their use of borrowed money to
make investments. The borrowed at low rates, and make
investment that yield a much higher return, putting very little of
their own money at risk.
Jan 22,2008 Bernanke’s Big rate Cut- With global markets reeling , the Federal
Reserve announces the biggest one day cut ever in the bench mark
interest rate in an attempt to stanch the bleeding .The S.&P.500 closes
at 1,310.50 down 1.1%.

March 16 2008 Bear Stearns is Sold- Two moth after announcing that its chief
executive would step down because of losses related to subprime
mortgages, Bear Stearn is sold to JP Morgan Chase for a mere $ 2
/share less than 1/10th the firm’s market price two days before. To
mark the deal happen, the Federal Reserve approves a $ 30 billion
credit line to help JP Morgan , JP Morgan eventually ups the bid to
$ 10 a share in stock. The next day the S.&P.500 closes at 1,276.60,
down 0.90%.
June 25,2008 More European Turmoil- Barclays joins rivals in tapping the
wealth of Asian and Middle Eastern investors to strengthen its
capital base. The move indicates that losses from the subprime
mortgage turmoil in the US continue to wear European banks.
The S.&P.500 closes at 1,321.97 up 0.59%.
Jun 7,2008 Shares of Fannie Mae and Freddie Mac Fall sharply after an analysis
report suggests that a change in accounting rules could require the
companies to raise more capital. The S.&P.500 closes at 1,252.31
down 0.84%.

July 11 2008 Failure at Indy Mac Federal regulators seize Indy Mac Bancorp,
making one of the largest bank failures in the American history. The
Bank once part of the Countrywide Financial Corporation , is the
first major bank to shut its doors since the mortgage crisis erupted
The S.&P.500 closes at 1,239.49, down 1.11%.

July 26,2008 Government backs troubled mortgages- After months of delay,

Congress hurries to pass a housing bill that gives the Treasury new
powers to lend or invest in Fannie Mae and Freddie mac . The act
also creates a program to refinance & give the government’s
backing to troubled home mortgages. In the next day of trading ,the
S.&P.500 closes at 1,237.37 down 1.86%.
Sept ,2008 Troubles Spiral- As losses rise, firms like Lehman Brothers have more
difficulty raising capital and investors lose confidence . Banks tighten
lending standards, squeezing the economy and the financial system in a
self- perpetuating cycle.

Sept 7 2008 US Rescues Fannie and Freddie- The Bush administration seizes control
of the nation’s two largest mortgage finance companies, Fannie Mae and
Freddie Mac, in an attempt to drastically shrink their out size influence
on Wall Street and on Capital Hill, while the same time counting on
them to pull the nation out of its worst housing crises in decades. The
rescue package represents an extraordinary federal intervention in
private enterprise. The S.&P.500 closes at 1,267.79, Up 2.05%.

Sept 15,2008 Merrill and Lehman Roil the market – Merrill Lynch agrees to sell
itself to Bank of America for roughly $ 50 billion to avert a deepening
financial crisis, while another prominent securities firm, Lehman
Brothers, files for bankruptcy protection and hurtles towards
liquidation after it failed to a find a buyer. the Dow Jones industrial
average closes at 10,917.51 down 4.42%.
Sept 15 ,2008 A life line for AIG- Gov. David A. Paterson of New York says the state
will allow the American International Group , a big Insurance
Company , to borrow $ 20 billion from its subsidiaries to bolster its
capital as it faces potentially disastrous credit downgrade.

Federal Reserves agrees to rescue A.I.G.- Fearing a financial crisis

Sept 16 2008
worldwide, the Federal Reserve reserved course and agreed to an $
85billion bailout that would give the government control of the
troubled insurance giant AIG. The decision is the most radical
intervention in the private business in the central bank’s history.

Sept,23,2008 Japanese bank Go on Shopping – Nomura to propose

distressed American Assets