January began with the Dow at its peak for the year (13,265) but with rumblings of trouble ahead. Alan Schwartz replaced Jim Cayne as CEO of Bear Stearns, Bank of America offered $44 billion in stock for Countrywide, and Citigroup and Merrill Lynch hit up foreign investors for a combined $19 billion. Late in the month the FBI launched an investigation into 14 subprime lenders, including Countrywide. For diversion there was the $7.2 billion in losses suffered by Société Générale thanks to the striving of “rogue trader” Jerome Kerviel.
A mercifully short month that began most optimistically: Securities and Exchange Commission chairman Christopher Cox told the European-American Business Council that the SEC was “very comfortable that their positions are strong,” “they” being the five largest U.S. investment banks (we mention them parenthetically in case you’ve forgotten some of the names — Morgan Stanley, Lehman Brothers, Bear Stearns, Merrill Lynch, and Goldman Sachs). A week later, PricewaterhouseCoopers CEO Samuel DiPiazza warned that subprime woes would soon spread beyond the financial sector. Over the course of the month the Dow declined 500 points.
The Ides of March were visited upon Bear Stearns as JPMorgan acquired the firm for $2 a share plus a federal backstop. Earlier in the month Federal Reserve chairman Ben Bernanke urged banks to modify mortgage payments for struggling homeowners. Late in the month the Treasury Department rolled out a blueprint for regulatory reform, while Fannie Mae and Freddie Mac had their capital requirements reduced substantially by the Office of Federal Housing Enterprise Oversight. The Dow rebounded by about 200 points.
The International Monetary Fund said the United States was heading for a recession and would drag the rest of the world down with it. Washington Mutual wrote down more than $1 billion in first-quarter losses and exited the mortgage business. Bankruptcies in 2007 were found to be up 44 percent from the previous year. Meanwhile, Lehman CEO Richard Fuld said the worst of the credit crunch’s impact on the financial-services sector was behind us. The Dow inched toward 13,000.
As the SEC began to take a hard look at the triple-A ratings doled out to mortgage-backed securities by the ratings agencies (including one report that a computer glitch may have mistakenly assigned such a rating to certain European debt products), Fannie Mae and AIG reported huge quarterly losses and April home foreclosures were found to have shot up 65 percent compared with the same month in 2007. The SEC’s Cox called for better oversight of banks. AIG announced a plan to raise $20 billion in capital to offset losses.
A month of notable job losses: first, high-profile Lehman CFO Erin Callan departed. Later in the month Goldman said it would lay off 10 percent of employees in certain divisions and Citigroup reported cuts of 6,500 in its investment banking group. Three SEC commissioners told Congress that it was “absolutely” time to bring significant new regulations to bear on credit-rating agencies. Of the 33 companies to default on debt as of June (a 50 percent increase over all of 2007), 32 were American. Car sales hit a 10-year low. The Dow dropped about 1,000 points over the course of the month.
Good times and bad times for beverages: Starbucks announced plans to close 500 stores and lay off 7 percent of its workforce, but winemaker Constellation Brands saw a 50 percent jump in Q1 profits. GM announced cost cuts intended to raise $15 billion, but CEO Rick Wagoner said, “We have no thought of [bankruptcy] whatsoever.” The same could not be said for IndyMac, which became the second-largest bank in history to fail. Banks posted huge losses, and the SEC suspended short-selling of financial firms’ stocks. Responding to Treasury Secretary Henry Paulson’s plan to pump up Freddie and Fannie with taxpayer money, Sen. Jim Bunning (R-Ky.) said, “When I picked up my newspaper…I thought I woke up in France. But no, it turned out it was socialism here” in the United States.
Freddie Mac announced an $821 million Q2 loss, triple the consensus forecast, prompting it to take a $2.5 billion write-down and cut its dividend 80 percent. Data showed that business bankruptcies surged 42 percent in the first half of the year, with Chapter 7 liquidations outpacing Chapter 11 reorganizations by a ratio of 4:1. The percentage of junk bonds at distress level reached a five-year high. The Dow ticked up slightly for the month.
Where to begin? Fannie and Freddie were placed in conservatorship. Lehman Bros. went bankrupt. Bank of America bought Merrill Lynch. The AIG bailout began. Fed chairman Bernanke and Secretary Paulson addressed Congress on a bailout plan for the entire banking industry. Wells Fargo acquired Wachovia. Treasury announced a temporary guaranty program for U.S. money markets. John McCain announced that if he were President, he would fire SEC chairman Christopher Cox, who had “turned our markets into a casino.” The Dow dropped below 11,000 for the first time since July 2006.
Monday, October 6, kicked off the Dow’s worst week in 100 years, as it fell more than 15 percent to a new low for the year of 8,451. The House passed the $700 billion rescue plan it had rejected earlier, thanks to an additional $150 billion in tax breaks. The Congressional Budget Office estimated that pension plans lost $2 trillion in the bear market. Banks battled with auditors and investors over whether the SEC should ease fair-value accounting rules. The federal funds rate was cut to 1 percent, capping a weeks-long effort between U.S. and European banks to devise policies to contain the crisis.
The election dominated the headlines and the economy dominated the elections as Democrats swept into office. By the end of the month President-Elect Barack Obama had fleshed out his economics team, voiced support for an auto-industry bailout, and indicated that a New Deal–esque stimulus program was a top priority. The CEOs of the Big Three flew to Washington in search of a bailout, but more attention was paid to their mode of travel. The Dow crested at 9,500 in a brief postelection blip before sinking to a new low of 7,552 two weeks later.
It became official: we’re in a recession. Not only that, it turns out we have been for a year. Investors gobbled up $30 billion worth of short-term Treasury notes offering zero percent interest, while rates on longer-term notes dipped below 1 percent. November saw nearly 500,000 workers laid off and many economists predicted that ’09 would be worse. Financier Bernie Madoff was implicated in what may be the biggest Wall Street fraud in history.*
*Timeline covers events through 12/15/08.
Scott Leibs is executive editor of CFO. Additional reporting by Alix Stuart and Kate Plourd.