Section 66 2008, What a Year! (New Section)

• Library: Business Transitions 2009 Supp

It does not appear that any of the leading economists claim to have predicted the full implications of the past year’s events on the viability of major American institutions and businesses or the damage that has been caused to the United States’ financial system and economy as a whole. Accordingly, it is important to review these events and the responses of the market, the business community, and government.

Some began to take notice when, on May 30, 2008, JP Morgan Chase & Co. (Chase) acquired Wall Street icon Bear Stearns & Co., Inc. (Bear Stearns), for $236 million, or a mere $2 per share, in a
last-minute rescue that was brokered over a frantic weekend in March 2008 with $29 billion in assistance from the Federal Reserve System (Federal Reserve). Bear Stearns was assumed by most to be one of those Wall Street titans that was so large and so valuable to, and inextricably linked with, the overall financial system that it was simply “too large to fail.”

That myth that institutions “too large to fail” exist was somewhat dispelled shortly thereafter when, on July 11, 2008, the Office of Thrift Supervision permanently closed IndyMac Federal Bank, FSB (IndyBank) and placed it in receivership at a cost to the Federal Deposit Insurance Corporation (FDIC) of $8.9 billion.

Still, while somewhat alarmed by these events, most people seemed to consider them to be isolated and the result of the businesses’ massive investments in the deteriorating residential real estate mortgage market. More started to take notice of the developing weakness of the overall financial system in August 2008 when, during the Beijing Olympics, the Shanghai market hit a 19-month low, having lost more than 40% of its value in a period of less than
9 months. At the same time, America’s Gross Domestic Product (GDP), which is 70% based on American consumer spending and which alone accounts for 28% of worldwide GDP, also began to dramatically slow. As consumer spending continued to slow, global market weakness increased, and the United States headed steadily toward a recession from which it has not yet emerged.

Other world economies, already dealing with their own challenges, had those problems compounded as the United States’ recession significantly impacted the global markets because of the United States’ status as the world’s largest importer. The entire worldwide economy seemed to grind to a halt as consumer sales plummeted, resulting in millions of employee layoffs, which, in turn...