Galt Stock Research 
Stock Market Newsletter
for Self Manage Stock Traders
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Timeline of the Economic
Collapse
l2007
THE BEGINNING OF THE END By summer '07 the housing
market is in trouble -- prices falling, inventories
and foreclosures
rising.
lJune
2007 THE FIRST SEISMIC
SHOCK Two Bear
Stearns hedge funds are forced into bankruptcy -- they
had invested in AAA-rated mortgage-backed securities
whose value had plummeted.
lAugust 2007 THE FEAR METER
RISES The TED
spread shoots up and stays high, indicating an
"unprecedented" level of fear in the global
economy.
lMarch
10th, 2008 RUMORS: BEAR'S IN TROUBLE Bear Stearns'
stock starts falling around 11 a.m. on Monday on
rumors the company may be running out of cash. By
afternoon the stock -- which traded as high as $171
per share in 2007 -- hovers around
$60.
lMarch
11th, 2007 BEAR'S CRISIS GROWS Some hedge funds pull
money amid swelling rumors of liquidity problems. The
rumors are also fueled by a flurry of novation
requests, in which Bear's trading partners ask a third
party to purchase their contracts with Bear for a
fee.
lInside Bear, Ace Greenberg tries
to keep up spirits. According to The Wall Street
Journal, Greenberg performed magic tricks and at the
request of his colleagues, "he also reprised a scene
from company lore: He practiced a golf swing on the
trading floor, just as he had on Black Monday 1987,
when world markets crashed. Mr. Greenberg, who doesn't
play the game, had famously pretended to swing a club
and loudly announced he was taking the next day
off."
lIn
mid-afternoon, Bear -- which has nearly $18 billion in
cash reserves at the time -- decides to put former CEO
and current board member Alan "Ace" Greenberg on CNBC
to reassure the market. Greenberg says the rumors are
"ridiculous."
lMarch
12th, 2008 BEAR'S CEO GOES ON TV After internal
debate, a decision is made to offer an interview with
Bear CEO Alan Schwartz to CNBC's David Faber. Right up
front, Faber raises the specter that Goldman Sachs,
Bear's most important client, might be beginning to
desert the firm. On Wed. afternoon, some repo lenders
start to suggest they might not renew Bear's loans the
next morning.
lThat
night, Bear's senior management and advisers huddle to
discuss their strategic
options. Despite
the falling stock price, Schwartz tells his executives
at lunch, "This is a whole lot of noise." By end of
day, Bear's cash reserves are down to $3.5
billion.
lMarch 13th, 2008 THE RACE TO FIND
A BUYER FOR BEAR That night, JP Morgan CEO Jamie
Dimon is celebrating his birthday at a family dinner
when his cell phone rings. It's Schwartz asking for
an infusion of up to $30 billion, or for JP Morgan to
buy Bear outright. Dimon tells Schwartz to ask the
Fed or Treasury Department for help, but sends over a
team to start examining Bear's books. Geithner also
sends a Fed team over.
lMarch
14th, 2008 A DEAL WITH THE FED After examining its
books, JP Morgan and the Fed realize the extent of
Bear's toxic assets, including sub prime mortgages and
credit default swaps, and its frightening
interconnectedness with other banks. At 4 a.m.
Geithner calls his boss, Fed chief Ben
Bernanke.
lProhibited from lending directly
to Bear, Fed officials work out a plan to loan money
to JP Morgan, which, in turn, will provide funding "as
necessary" to Bear for 28
days.
lBear
executives are relieved to have a month to resolve
their problems. But the company is hammered again in
the market and on his way home, Schwartz gets a call
from Paulson and Geithner, telling him they want a
deal in place by the time Asian markets open Sun.
night.
lMarch
16th, 2008 THE DEAL THAT RESCUES BEAR Spooked by
Bear's books -- as well as a New York Times article
that morning that asked "Why save Bear Stearns?", --
JP Morgan executives have second thoughts. They
abruptly withdraw the offer Sunday
morning.
lWith
the Asian markets set to open at 6 p.m. EST, Bernanke
pushes back and the Fed agrees to sweeten the deal
with $30 billion to guarantee Bear's toxic loans. JP
Morgan is prepared to offer $4 per share for Bear, but
worried about moral hazard, Treasury Secretary Henry
Paulson insists JP Morgan drive down the price to $2
per share. Bear board members are outraged but realize
they have no other options and approve the
deal.
lMarch
24th, 2008 BEAR/JP MORGAN DEAL
REVISED In
order to get the deal through the Bear shareholder
vote, JP Morgan raises the purchase price from $2 to
$10 per
share.
lJuly 2nd, 2008
PAULSON: FINANCIAL INSTITUTIONS MUST BE ALLOWED
TO FAIL In a London speech, Treasury
Secretary Henry Paulson outlines key challenges to
U.S. and global capital markets and calls for
improvements in regulatory structures. He warns: "For
market discipline to be effective, it is imperative
that market participants not have the expectation
that lending from the Fed, or any other government
support, is readily available. ... For market
discipline to constrain risk effectively, financial
institutions must be allowed to
fail."
lJuly
13th, 2008 PAULSON SEEKS POWER FOR POTENTIAL FANNIE /
FREDDIE TAKEOVER The world's largest mortgage lenders
are hammered by losses related to the housing crisis.
In mid-July, their stocks fall more than 60 percent.
Testifying before Congress, Treasury Secretary Paulson
asks for authority to take them over, but he hopes
never to have to use it: "If you've got a bazooka and
people know you've got it, you may not have to take it
out," he explains.
lSeptember 7th, 2008 FEDS TAKE OVER
FANNIE / FREDDIE On Friday Sept. 5, the heads of
Fannie and Freddie are called into separate meetings
with Secretary Paulson and James Lockhart, director of
the Federal Housing Finance Agency, the companies'
chief regulator. They are told the government is
taking 80 percent ownership in each and giving them
access to up to $200 billion in capital. Both
executives will be
replaced.
September 10th, 2008 LEHMAN
SCRAMBLES To assuage the market, Lehman holds an
analyst/investor conference call to announce its $3.9
billion third-quarter loss a week early. It unveils a
new restructuring plan. But executives don't mention a
need for more capital, despite internal calculations
that the firm will need an additional $3-5 billion by
early 2009. (Prosecutors later open up an
investigation on whether Lehman misled investors on
this call.)
lSeptember 11th, 2008 HUGE MONEY
OUTFLOW AT LEHMAN Lehman's computerized trading system
freezes when JP Morgan demands another $5 billion in
collateral on short notice. Rising numbers of hedge
funds and other customers continue pulling their
business from Lehman.
Sept. 12-14th,
2008 Friday night, after markets
close, Paulson and Bernanke summon the heads of Wall
Street's largest firms to the Federal Reserve Bank in
New York. Concerned about moral hazard, Paulson makes
clear there will be no bailout for Lehman. Fed
officials insist they don't have authority for a
rescue because the bank doesn't have enough
collateral. Geithner says somebody needs to buy
Lehman.
l
September 12th-14th,
2008: AN EXTRAORDINARY WEEKEND
Competitors examine Lehman's books and Bank
of America and Barclay's emerge as the main suitors. But
Bank of America decides to buy brokerage firm Merrill Lynch
instead; Barclay's drops out on Sunday. Lehman is forced to
file for bankruptcy protection.
lSeptember 16th, 2008
GLOBAL PANIC After Lehman goes under, the
stock market nosedives and global credit markets
freeze. Shares of the Primary Reserve Fund -- a
conservative money market fund widely viewed as being
nearly as safe as cash -- fall below $1. The fund
holds nearly $800 million in commercial paper -- a
form of short-term debt -- issued by Lehman. Hedge
funds that used Lehman's London office to trade have
billions of dollars frozen in Lehman's bankruptcy.
The LIBOR rate, which reflects the rate at which
banks are willing to loan to each other, shoots up
overnight from 3.11 percent to 6.44 percent -- the
largest spike ever. But banks still are unwilling to
loan to each other.
lSeptember 16th, 2008 AIG IS
NATIONALIZED Shares of the world's largest
insurance company fall 61 percent because AIG had
poured billions into unregulated credit default swaps
-- insurance policies on companies like Lehman --
betting they'd never go bankrupt. AIG needs cash, but
credit markets are frozen. The Fed agrees to a
two-year $85 billion loan; the government takes an 80
percent ownership stake in
AIG.
September 17th, 2008 BERNANKE TO
PAULSON: "WE NEED A BAILOUT" On Wed., the Dow closes
down 449. But that's not the worst of it: The credit
markets have nearly frozen up. Investors are moving
money from stocks, bonds and money market funds to
Treasury bills, seen as the safest investments in the
world.
lWed.
night, Bernanke calls Paulson and tells him it's time
to start thinking about a full-scale bailout of the
nation's entire financial system. "We can't keep doing
this," he says, "Both because we at the Fed don't have
the necessary resources and for reasons of democratic
legitimacy, it's important that the Congress come in
and take control of the
situation."
lSeptember 18th, 2008 WE MAY NOT
HAVE AN ECONOMY MONDAY Paulson and Bernanke go to
Congress to present a rescue plan to congressional
leadership. "If we don't do this, we may not have an
economy on Monday," warns
Bernanke.
lSeptember 20th, 2008 PAULSON SENDS
3-PAGE BILL TO CONGRESS The emergency plan asks for
$700 billion to buy up toxic mortgage securities from
the banks, and does not allow for an oversight
mechanism from Congress or the courts. The
congressional reaction -- particularly from
conservative Republicans -- is full
revolt.
lSeptember 21st, 2008 THE END OF
WALL STREET AS WE KNOW IT Wall Street's last two
investment banks -- Goldman Sachs and Morgan Stanley
-- announce they're turning themselves into bank
holding companies, regulated by the Federal
Reserve.
lSeptember 22nd, 2008 A BIZARRE
MEETING AT THE WHITE HOUSE On the day Washington
Mutual becomes the largest bank failure ever,
congressional leaders, President Bush and the two
presidential candidates meet at the White House on the
proposed bailout plan.
lSeptember 29th, 2008 HOUSE REJECTS
BAILOUT PLAN In addition to many Republicans, 95
Democrats vote against the bailout measure. The Dow
plunges 778 points -- the greatest single-day point
loss ever. Paulson would later tell The New York
Times, "I never felt worse than when the House voted
no."
lOctober 3rd, 2008 CONGRESS PASSES
BAILOUT BILL In the wake of the bill's failure there
is a debate over whether purchasing the banks' toxic
mortgage assets is really the way to go or whether the
plan should focus on injecting capital directly into
the banks.
lThe
bill gives the Treasury secretary "broad authority" to
purchase $700 billion in mortgage assets from the
banks. But six lines of text buried deep within the
bill authorize Treasury to provide capital injections.
Soon after the bill's passage, Paulson abandons the
idea of buying the toxic
assets.
lOctober 13th, 2008 A DRAMATIC
MEETING WITH BANKERS Paulson calls the CEOs of the
nation's nine largest banks to his office -- Jamie
Dimon (JP Morgan), Robert Kelly (Bank of New
York/Mellon), John Thain (Merrill Lynch), Ronald Logue
(State Street), John Mack (Morgan Stanley), Lloyd
Blankenfein (Goldman Sachs), Ken Lewis (Bank of
America), Vikram Pandit (Citigroup) and Richard
Kovacevich (Wells Fargo). He tells them they each must
accept billions in direct cash
infusions.
It was
serious. It was somber. And the government did most of
the talking. I was there to explain our liquidity
guarantee program. We did not really weigh in on the
capital infusion. That discussion was really led by
Treasury and the Fed.
lI
think some of the banks were surprised. Some were
immediately supportive. Others really pushed back: "We
don't need this money. We don't want the money. We
don't want all the conditions." And I think Treasury
was very firm that … they wanted them all to take it,
because they needed to have a healthy understanding of
the challenges that may be coming ahead. And everybody
needed to bolster their balance
sheet.
lBut the
bottom line was, this was not a request. This was a
demand.
It was
very clearly expressed expectation, yes. I think
that's right. …
Did you ever imagine that you'd
be sitting in a meeting where $250 billion of bank
stocks would be purchased by the
government?
lThat
was $125 billion for those [nine banks], and the rest
was for the smaller
institutions
lYes,
it's truly extraordinary. And there are obviously
tradeoffs on that with government ownership.
…
lMy
view is, we supported it as an initiative to stabilize
banks, to bolster their balance sheet. Those are very
positive things. But there needs to be an exit
strategy. And if banks can, down the road, demonstrate
that they're really in a position to get the
government out, then I think that's something that
should be facilitated. We need an exit strategy for
all of this, because we don't want government support
to become a crutch. And then we'll have larger
problems with our economy for a much longer period of
time if that is the case.
lSecretary Paulson called it
objectionable but unavoidable. Do you
agree?
lYeah,
that's a good quote. … Surreal
maybe...
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