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As housing prices fell, global investors no longer were in the market for mortgage-related securities. In July of 2007, investment bank Bear Stearns announced that two of its hedge funds had dropped significantly in value. These funds had invested in securities that obtained their value from mortgages. When the value of these securities dropped, investors demanded that these hedge funds provide additional collateral. This created a frenzy of selling in these securities, which lowered their value further.
In the years leading up to the crisis, the U.S. had received large amounts of foreign money from fast-growing economies in Asia and oil-producing and exporting nations. This influx of funds combined with low U.S. interest rates led to easy credit conditions which fueled both housing and credit bubbles. Mortgages, credit cards, and other personal loans were easy to obtain and consumers debt grew significantly. Investors around the world began to invest in the U.S. housing market. But when housing prices declined, major global financial institutions that had borrowed and invested heavily in this market reported significant losses. Defaults and losses on other loans also increased significantly as the crisis spread from the housing market to other parts of the economy.
While the housing and credit bubbles were growing, financial institutions were not adequately regulated to account for their risk taking. The losses experienced by financial institutions on their mortgage securities adversely effected their ability to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the banking system.
Central banks around the world cut interest rates which had adverse effects on global stock markets. Between January and October 2008, owners of stocks in U.S. corporations had suffered about $8 trillion in losses, as their holdings declined in value by about 40%. Losses in the stock markets and housing value declines also caused declines in consumer spending.
From September 2008 to September 2012, there were approximately 4 million completed foreclosures in the U.S. As of September 2012, approximately 1.4 million homes, or 3.3% of all homes with a mortgage, were in some stage of foreclosure. Increasing foreclosure rates increased the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981. This glut of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure.
The crisis hit a critical point in September 2008 with the failure, buyout or bailout of the largest entities in the U.S. investment banking system. Investment bank Lehman Brothers failed, while Merrill Lynch was purchased by Bank of America. Investment banks Goldman Sachs and Morgan Stanley obtained access to emergency lines of credit from the Federal Reserve. Government-sponsored enterprises Fannie Mae and Freddie Mac were taken over by the federal government. (Fannie Mae and Freddie Mac are federally backed home mortgage companies created by the U.S. Congress. Neither creates or services its own mortgages. They buy and guarantee mortgages issued through lenders in the secondary mortgage market.) In late 2008, the federal government bailed out Insurance giant AIG for $180 billion.
During a one-week period in September 2008, $170 billion were withdrawn from USA money funds, causing the Federal Reserve to announce that it would limit its guarantee on these funds. This credit freeze brought the global financial system to the brink of collapse.
In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with President George W. Bush and key legislators to propose a $700 billion emergency bailout of the banking system. Bernanke reportedly told them: "If we don't do this, we may not have an economy on Monday." The Emergency Economic Stabilization Act, also called the Troubled Asset Relief Program (TARP), was signed into law on October 3, 2008.
In a nine-day period from Oct. 1-10, the markets dropped significantly, resulting in the largest percentage drop in the history of the Dow Jones Industrial Average - even worse than any single week in the Great Depression. Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30–35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, dropped to $8.8 trillion by mid-2008.
The unemployment rate rose from 5% in 2008 pre-crisis to 10% by late 2009, declining to 7.6% by March 2013. The number of unemployed rose from approximately 7 million in 2008 pre-crisis to 15 million by 2009, then declined to 12 million by early 2013. The U.S. total national debt rose from 66% of GDP in 2008 pre-crisis to over 103% by the end of 2012.
On 13 February 2008, President George W. Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. Checks were mailed starting the week of 28 April 2008. However, this rebate coincided with an unexpected jump in gasoline and food prices. On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cuts. The U.S. government continued to run large deficits after the crisis, with the national debt rising from $10.0 trillion as of September 2008 to $16.1 trillion by September 2012. The debt increases were $1.89 trillion in fiscal year 2009, $1.65 trillion in 2010, $1.23 trillion in 2011, and $1.26 trillion in 2012.
The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearns and Merrill Lynch), or were bailed-out by the U.S. government (Goldman Sachs and Morgan Stanley) during 2008. Government-sponsored enterprises Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations. They were placed into receivership in September 2008.
As a result of the financial crisis in 2008, twenty-five U.S. banks became insolvent and were taken over by the FDIC. As of August 14, 2009, an additional 77 banks became insolvent. On February 18, 2009, President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages.