Great Stock Market Crashes | 07-09 Subprime Mortgage Crisis

By Mike Rowan, 09/08/2009

The Mortgage and Financial Bust started in the Fall of 2007

When: 2007 - Ongoing

Percentage Lost From Peak to Bottom: Nearly 60% as of Spring of 2009. The S&P went from 1576.09 to 666.79

Nothing like living through history, huh?

We all wish that this one was in the history books, as the subprime mortgage crisis has absolutely decimated the U.S. and World Economies over the past 2 years. Arguably, there has never been such a whirlwind to move through the financial system, resulting in unprecedented government intervention of over a trillion dollars in bailouts, rescues, and stimulus packages……so far that is…

The financial crisis of 2007–2009 has been called the most serious financial crisis since the Great Depression by leading economists, with its global effects characterized by the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity. Many causes have been proposed, with varying weight assigned by experts. Both market-based and regulatory solutions have been implemented or are under consideration, while significant risks remain for the world economy.

Subprime Mortgages and the Real Estate Bubble

Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages. Subprime Mortgages are innovative financial tools that allow lenders to lend to subprime borrowers without taking responsibility for the risk of future default.

When U.S. house prices began to decline in 2006-07, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value running roughshod over companies balance sheets and investment holdings. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world.

Subprime Asset Backed Securities Corporate Casualties

The victims of the subprime mortgage crisis are individuals and corporations alike. The number of high profile firms that were forced to close their doors included Bear Stearns, Lehman Brothers, and Washington Mutual. AIG, General Motors, Ford, Citigroup, and Merrill Lynch, were brought back from the dead either by government bailout, acquisition, or going through bankruptcy proceedings. These corporate names are a who’s who of American economic titans historically speaking. However, this economic storm did not discriminate, and stuck with amazing quickness.

Hopefully we have rounded the corner and we can put this one down in the record books as one of those “remember when” moments in history. On the other hand, at the time of this entry, unemployment rates are nearing 10%, and uncertainty remains a grim reality.