2008 FINANCIAL CRISIS TIMELINE
and IMPACT ON THE FEDERAL BUDGET
Prior to the Financial Crisis, the total Federal Debt had already nearly doubled...
--Debt Held by the Public had increased from $3.3 trillion in FY 2000 to nearly $6 trillion early this year, and
total Federal Debt had nearly doubled from $5.7 trillion to $10 trillion. And the FY 2008 budget deficit added
more than $450 billion to total Federal Debt.
--Consequently, the financial measures summarized below are not funded with current taxpayer dollars because
the Treasury is already operating in the red. Rather, the costs will be borne by subsequent generations of
taxpayers who will bear the burden of massive annual interest payments (already nearly $250 billion per year).
Seeds of the Financial Crisis:
--Banks were issuing “subprime mortgage loans” (which are risky loans that start with low “variable” interest rates
that increase dramatically after an initial period).
--As long as home prices were rising, borrowers who found that they couldn’t afford the higher monthly payments
could sell their houses at a profit and pay off the loan.
--But when the “housing bubble” burst and home prices fell, homeowners with financial problems lost their homes
in foreclosures, while banks and other mortgage-lenders lost money (unable to recover the amount of the mortgage
--The financial impact of the foreclosures was magnified throughout the economy due to the widespread marketing
of “mortgage-backed securities” (MBSs), which bundled 1000 or more individual mortgages.
--Investment firms bought the MBSs and in many cases borrowed money to buy them (known as “leveraging”) –
which magnified their financial risk.
--In an earlier move that created the conditions for the current crisis, investment banks in 2004 successfully lobbied
the SEC for a weakening of regulations that allowed them to use more cash reserves to buy MBSs.
--When the housing bubble burst and subprime mortgages went bad in early 2008, a highly leveraged (deeply
indebted) investment bank – Bear Stearns – collapsed and, as the crisis unfolded, Lehman Brothers went bankrupt
and other investment banks were sold.
--Amidst a cascade of fear about the solvency of financial institutions and corporations, lenders stopped offering
standard business operating loans.
--Without sufficient credit, businesses slowed spending and laid off workers, which in turn reduced consumer
spending, causing a vicious circle of declining economic activity.
2008 Financial Crisis Time Line Federal Budget Impact
March 2008: Bear Stearns, one of the largest global No direct budget impact, but ignited a crisis of
investment banks, was sold for a fraction of its confidence in the financial markets.
previous value due in large part to the subprime
July 2008: Fannie Mae and Freddie Mac share No direct budget impact, but the plunge in Fannie and
values plunged in July 2008 due to concern about the Freddie stocks led to enactment of the housing rescue bill
value of their mortgage-backed securities and their and the subsequent Federal takeover on September 7,
ability to borrow from credit markets. 2008. (see below).
--Fannie and Freddie are shareholder-owned
corporations, originally chartered by the government,
that play a central role in mortgage finance. The two
GSEs (government-sponsored enterprises) buy home
mortgages from the original lenders, repackage them
as mortgage-backed securities and either sell them or
hold them in their own portfolios. This allows the
original lenders to make additional mortgages.
--However, when the housing bubble burst and
mortgage-backed securities lost value, Fannie and
Freddie shares plunged.
July 13, 2008: Treasury announced an effort to Giving Fannie and Freddie an increased line of credit
backstop Fannie and Freddie—in coordination with would increase Treasury Debt, as would Treasury
the Fed—by increasing the GSE’s line of credit with purchasing equity in the GSEs. However, this was never
the Treasury and announcing Treasury’s right to calculated since by early September, Fannie and Freddie
purchase equity in the GSEs. were seized (see below).
July 30, 2008: President signed into law the Housing CBO said there was a more than 50% probability that the
and Economic Recovery Act of 2008 which: Fannie and Freddie provisions would not need to be used,
--Increased the Treasury line of credit to Fannie and but said if they were used the costs to the Treasury could
Freddie; be as high as $100 billion. Due to the uncertainties, CBO
--Provided authority to purchase stock in Fannie and estimated a cost of $25 billion.
--Created the Federal Housing Finance Agency
(FHFA) to regulate Fannie and Freddie;
--Increased to $625,000 the size of mortgages Fannie
and Freddie can purchase;
--Authorized $300 billion in FHA loan guarantees to
assist in restructuring mortgage loans;
--Provided a $7500 refundable tax credit for first-time
--Increased the Federal Debt Ceiling from $9.8
trillion to $10.6 trillion in anticipation of the need for
Treasury to support Fannie and Freddie.
Sept. 7, 2008: Fannie Mae and Freddie Mac seized CBO Director Orszag said on Sept. 9 that CBO intended
by Government. The newly-created Federal Housing to incorporate the assets and liabilities of Freddie and
Finance Agency (FHFA) assumed full authority over Fannie into the Federal budget baseline. How this will
the assets and operations of Fannie and Freddie – an translate into annual deficit calculations remains unclear.
action that had been viewed in July as unlikely. One thing we know for sure is that if Treasury spends
$200 billion for preferred stock in the GSEs, that amount
Specifically, Treasury committed to invest as much as will add to total Federal Debt.
$200 billion in preferred stock to guarantee solvency
and protect current holders of Fannie and Freddie OMB, on the other hand, said on Sept. 12 that they would
debt. keep Fannie and Freddie’s operations off-budget despite
the Federal takeover. Nevertheless, if Treasury spends
However, the commitment to stand behind all Fannie $200 billion for preferred stock in the GSEs, that amount
and Freddie debt obligations exposes the government will add to total Federal Debt.
to about $5 trillion of debt.
Sept. 14, 2008: Bank of America buys Merrill Lynch. No direct impact on Federal Budget.
Sept. 15, 2008: Lehman Brothers files for bankruptcy. No direct impact on Federal Budget.
Sept. 16, 2008: Federal Reserve gives insurance giant Initially, this will add up to $85 billion to the total
AIG (American International Group) an $85 billion Federal Debt, although the long-term budgetary impact
bridge loan. In addition, a $38 billion line of credit will depend on the financial health of AIG.
with the Fed, as well as a $21billion debt purchasing
arrangement with the Fed. (But see Nov. 10, below,
for modification of assistance.)
Sept. 19, 2008: Treasury announces it will provide Could add dramatically to Federal debt, depending on
guarantees for the nation’s money market mutual how often and how much the Treasury is called upon to
funds. backstop money market funds.
Sept. 20, 2008: Bush Administration proposes $700 (see October 1 legislation below)
billion financial rescue plan to buy mortgage-related
“troubled assets” from financial institutions over a
Sept. 29, 2008: House rejects $700 billion financial (see October 1 legislation below)
rescue bill by a vote of 228-205. Dow falls 777
points, the largest ever one-day drop.
Oct. 1, 2008: Senate passes revised financial rescue According to CBO, the TARP would “entail some net
bill (HR 1424) including: budget cost—which would, however, be substantially
smaller than $700 billion” (depending on eventual
--creation of Troubled Assets Relief Program income from selling the assets). Annual budget deficits
(TARP) that allows Treasury to borrow up to $700 would reflect projected net costs. Nevertheless, the
billion to purchase, insure, hold, and sell financial initial purchase of assets would require Treasury
instruments related to residential or commercial borrowing up to $700 billion—directly adding to the
mortgages issued prior to 3/14/08 accumulated Federal debt. (Also, CBO estimates a “few
billion dollars per year” for administrative costs.)
$250 b available immediately
$100 b additional released upon notification
$350 b if President submits detailed plan,
subject to 15-day congressional review
--temporary increase in FDIC insurance to $250K The increase to $250K per account could result in
through 2009; borrowing authority authorized to back significant new debt, depending on the number and size
up the increases of bank failures.
--renewable energy and conservation tax incentives The energy provisions, costing a net $1 billion in FY
’09, were largely offset by revenue raisers.
--AMT patch The AMT patch is projected to cost $79 billion in FY
’09, adding to the debt.
--individual and business “tax extenders” The tax extenders are projected to cost $24 billion in FY
’09, adding to the debt.
--increased debt ceiling to $11.3 trillion Expectations of potential new debt are reflected in the
increase of the debt ceiling to $11.3 trillion.
Oct. 3, 2008: House approves revised bailout bill (HR See above.
1424) by a vote of 263-171; President Bush signs into
law the same day (PL 110-343).
Oct. 6, 2008: Dow drops below 10,000 No direct impact, although it has the indirect impact of
falling tax revenues.
Oct. 8, 2008: Federal Reserve loans another $37.8 Initially, this will add another $37.8 billion to the total
billion to AIG, on top of the $85 billion loaned in Federal Debt, although the long-term budgetary impact
Sept. will depend on the financial health of AIG. The single
year deficit impact will depend on projections of future
Oct. 9, 2008: Dow Falls below 9,000 No direct impact, although it has the indirect impact of
falling tax revenues
Oct. 14, 2008: Treasury announced that it will use The $250 billion is to be taken from the TARP, which is
$250 billion of the previously authorized $700 deficit-financed.
billion to purchase “preferred” stock in major
banks in order to inject money directly into the
Under the plan, $125 billion goes to 9 banks;
Citigroup, Bank of America, Wells Fargo, and
JPMorgan Chase will each receive $25 billion in
return for preferred stock. Five banks will split
another $25 billion. Another $100 billion will be
available for smaller regional banks.
The government would also guarantee new debt The guarantee on new bank debt would result in Federal
issued by banks for 3 years in exchange for limits on outlays and increased debt if defaults occur.
executive pay and golden parachutes.
The FDIC will also now provide unlimited insurance The FDIC could incur costs associated with backing
to back all business accounts (non-interest-bearing business checking accounts at all banks.
checking accounts) in the U.S.
[Background: Preferred stock usually carries no voting
rights, but may carry superior priority over common
stock in payment of dividends and upon liquidation.]
Nov. 10, 2008: Fed restructures AIG (American The $40 billion stock purchase is to be taken from the
International Group) loan and adds additional TARP, which is deficit-financed.
relief to the rescue plan, increasing the total
package to more than $150 billion:
--reduce original $85 billion bridge loan to $60
billion, cut the interest rate, and extend the loan to 5
--Treasury will purchase $40 billion in preferred stock
--Fed will purchase up to $22.5 billion of AIG’s Fed’s purchase of MBS’s and the backstop for credit
mortgage-backed securities default swaps could require a Treasury loan to the Fed
(requiring more Treasury borrowing , adding to debt held
--Fed will also lend $30 billion to backstop AIG’s by the public)
credit default swaps
Nov. 12, 2008: Treasury Secretary Henry M. Paulson
Jr. said that the $700 billion financial bailout
program would not be used to buy troubled
mortgage-backed securities, as originally intended.
Instead, capital would be provided directly to nonbank
companies as well as banks and financial institutions,
and that more would be done to prevent home
foreclosures. Also ruled out use of TARP funds for
Nov. 18, 2008: Treasury Sec. Paulson, testifying at
House Financial Services Committee, says
Administration will not commit any of the remaining
$350 billion in TARP, and is firmly opposed to using
any of the TARP funds to provide a bridge loan to the
Nov. 23, 2008: In an effort to shore up Citigroup Inc. The $20 billion stock purchase is to be taken from the
(which had seen stocks plummet 60% the prior week), TARP, which is deficit-financed.
Treasury pledges to purchase another $20 billion in
preferred stock (beyond the $25 billion infusion in Additionally, there is potentially major exposure for
October). In addition, govt agencies (Treasury, FED, Federal Government as a backstop on Citi’s troubled
FDIC) pledge to back up to $306 billion of “troubled assets.
asset” losses (after Citi absorbs the first $29 billion).
Nov. 25, 2008: Treasury and Fed announce a new As with all TARP funding, the $20 billion is deficit-
$800 billion plan to ease the credit crunch. The Fed financed.
will purchase up to $600 billion of Fannie and Freddie
debt to boost mortgage lending at reduced rates. In
addition, the Fed will lend up to $200 billion to
holders of asset backed securities to boost consumer
and small-business loans (to be called the Term Asset-
Backed Securities Loan Facility), while Treasury will
provide $20 billion of TARP funds to provide credit
Commitment of the $700 billion TARP
(troubled asset relief program) funds
(enacted October 3, 2008)
Additional $250 billion Secretary Paulson has
subject to 15-day indicated an intention to
congressional review leave this portion of
TARP for the new
Additional $100 billion Treasury to purchase $40
at President’s discretion billion of AIG stock and
$20 billion of Citigroup
stock; another $20 billion
will support a Fed lending
program to support
consumer and small
business loans. ($20
Initial $250 billion Originally intended for
“purchase of troubled
assets”; now intended to
purchase stocks in major
banks and other financial
Question: Have recent actions taken by the Fed been financed by increased Treasury borrowing or
increasing the money supply?
Answer: Currently, the Treasury has deposited $479 billion at the Fed, which has allowed the Fed to
expand its lending programs without increasing the money supply. The money deposited by the Treasury
does not support any particular lending program. (Many thanks to the Congressional Research Service for
clarifying this issue.)