Subprime mortgage financial crisis

The crisis began to affect the financial sector in February 2007, when HSBC, at the time world's largest bank, wrote down its holdings of subprime-related mortgage backed securities by $10.5 billion. It was the first subprime related loss. All the involved major banks instantly came under close observation and top management of Merrill Lynch and Citigroup resigned within a week of each other in late 2007.

As the crisis deepened, more and more financial firms merged or sought merger partners. Bad news resulted in a panic in financial markets. Investors took their money out of mortgage bonds and related equities and transferred it into commodities. Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials.

When Lehman Brothers and other important financial institutions failed in September 2008, the crisis hit a key point. During a two day period in September 2008, $150 billion were withdrawn from United States money funds.

The average two day outflow had been $5 billion, so it was essentially a bank run on money market. Keep in mind that the money market had been a key source of credit for banks and nonfinancial firms. The TED spread which represents a measure of the risk of interbank lending, quadrupled shortly after the Lehman failure.

Credit crunch effects and bank losses
The credit freeze brought the global financial system to the brink of collapse. Having learned from the history lessons, governments and central banks reacted with equal force in order to prevent the total financial chaos. The response of the USA Federal Reserve, the European Central Bank, and other central banks was immediate during the last quarter of 2008. They purchased $2.5 trillion of United States government debt and troubled private assets from banks.

This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks. The International Monetary Fund estimated that large United States and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009.

According to some sources the Bank of America recorded a loss of $5.28 billion, Morgan Stanley a loss $10.3 billion. The Bear Stearns was a global investment bank and securities trading and brokerage, until its collapse and fire sale to JPMorgan Chase in 2008. The loss for Bear Stearns amounted to $2.6 billion. However, Citigroup topped the list in terms of loss amount with $24.1 billion. Merrill Lynch holds the infamous second place at $22.5 billion. Unfortunately, the bank losses weren't the only consequence from the subprime mortgage crisis. Most of the negative effects are active still today and probably will be for several years.

Next: Subprime mortgage crisis aftermath