Introduction
After a decade, despite their size, massive financial institutions are now considered more stable than they were then. They have raised nearly $1.5 trillion in the capital since the crisis, significantly increasing their capacity to absorb losses in the event of another problem. U.S. banks are generally seen as being especially strong since the Dodd-Frank Wall Street reform law of 2010 required that banks increase capital, conduct stress tests, and develop a plan for safely unwinding their operations. One of the most critical lessons from the 2007–2009 financial crisis was that some banks were "too big to fail banks." As leaders feared a systemic collapse, government bailouts were required for hundreds of financial firms worldwide. Ironically, the biggest banks in the world have grown rather than diminished over the past ten years.
This is true of numerous American financial institutions like JPMorgan Chase and Bank of America, both of which successfully bailed out weaker rivals to grow. Only two of the countless European banks that have drastically dropped are Barclays and Royal Bank of Scotland, respectively the biggest banks in the world in the middle of the 2000s; nevertheless, some unexpected outliers exist, such as the struggling German lender Deutsche Bank. Inflation on balance sheets in emerging markets like China has inflated in the meantime. According to total assets, the four biggest banks in China are currently among the top five largest banks globally.
AIG: The Biggest Bailout in History
After allowing Lehman Brothers to fail, the government intervened because it was clear that American International Group (AIG), which had substantial interests in credit default swaps, would also die. A low-interest loan was the initial investment in AIG, followed by acquisitions of preferred stock and mortgage-backed securities. Ultimately, taxpayer funds totaling more than $180 billion were invested in AIG. The initial investment was repaid to taxpayers as a net profit by 2012 because the government-owned about 80% of the business. AIG has been successful for a while but is currently experiencing financial difficulties. The firm lost $730 million due to the Covid epidemic in 2020.
Citigroup
Citigroup was a significant financial firm that became entangled in the web of mortgage security issuances. Lehman Brothers was undoubtedly severely impacted by the financial crisis, but Treasury Secretary Hank Paulson decided against saving the business, as he did other investment and money center banks. Consequently, it declared bankruptcy. The Dow fell 504 points that same day, underscoring the risk in the financial markets. On Wednesday, a general market panic jeopardized businesses' access to the short-term financing required to continue operating. It had grown beyond the capacity of monetary policy. Financial industry leaders concluded that a $700 billion bailout was needed to recapitalize the largest banks.
Morgan Stanley and Goldman Sachs: Becoming Commercial Banks
In addition to the government purchasing shares, the 2008 bailouts significantly affected the banking industry. Before the financial crisis, investment banks like Morgan Stanley and Goldman Sachs had no business dealing with commercial consumer banking. The Federal Reserve then allowed them to transition to retail banking, enabling them to engage in other government guarantee programs and borrow significantly via the discount window open to commercial banks. Morgan Stanley and Goldman Sachs borrowed billions at these low rates, which helped stabilize their companies. Additionally, as commercial banks, they can now access the hitherto inaccessible retail segment of the economy.
Evolution of Default Risk
The worsening of funding conditions in the markets for wholesale funds was one of the crisis's initiating triggers, but the timeline of commercial bank failures that follows exhibits a significant lag in comparison to time-series variation in aggregate funding conditions, as proxied for by 8. Several smaller non-commercial banks that weren't chosen went out of business before the fourth quarter of 2007. Nevertheless, the general trends noted in I continue to hold even when all bank failures are considered.
As an example, consider the TED message (shown in II). The failure of commercial banks during this episode cannot be solely attributed to their inability to meet short-term debt obligations due to deteriorating funding conditions, as evidenced by the wave of bank failures that occurred when funding pressures in the banking sector had wholly subsided.
Conclusion
The collapse of Bear Stearns and Lehman Brothers was the initial event that sparked the world financial crisis. Lehman declared bankruptcy and eventually went out of business because the U.S. government did not step in to save it. Bear Stearns discontinued operations after being purchased by JP Morgan. The United States government approved a $700 billion plan to bail out companies deemed "too large to fail" in reaction to the financial crisis's escalation.
Diverse estimates have it at $12.8 trillion, although some experts. AIG is still in business today, despite receiving the largest bailout in history—$180 billion—but as a scaled-back version that struggles to compete in the current market. Other big banks that received government assistance, such as JP Morgan, Bank of America, Morgan Stanley, and Goldman Sachs, are also doing well.
