Financial crisis of 2007–08

The financial crisis of 2007–08, also known as the global financial crisis and 2008 financial crisis, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. It threatened the collapse of large financial institutions, which was prevented by the bailout of banks by national governments, but stock markets still dropped worldwide. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 9, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity".

Financial crisis

The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in changes in the real economy.

Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time.

Types

Banking crisis

When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run renders the bank insolvent, causing customers to lose their deposits, to the extent that they are not covered by deposit insurance. An event in which bank runs are widespread is called a systemic banking crisis or banking panic.

Wall Street

Wall Street is a 0.7-mile-long (1.1 km) street running eight blocks, roughly northwest to southeast, from Broadway to South Street on the East River in the Financial District of Lower Manhattan, New York City. Over time, the term has become a metonym for the financial markets of the United States as a whole, the American financial sector (even if financial firms are not physically located there), or signifying New York-based financial interests.

Anchored by Wall Street, New York City has been called both the most economically powerful city and the leading financial center of the world, and the city is home to the world's two largest stock exchanges by total market capitalization, the New York Stock Exchange and NASDAQ. Several other major exchanges have or had headquarters in the Wall Street area, including the New York Mercantile Exchange, the New York Board of Trade, and the former American Stock Exchange.

History

Early years

There are varying accounts about how the Dutch-named "de Waal Straat" got its name. A generally accepted version is that the name of the street was derived from an earthen wall on the northern boundary of the New Amsterdam settlement, perhaps to protect against English colonial encroachment or incursions by Native Americans. A conflicting explanation is that Wall Street was named after Walloons— the Dutch name for a Walloon is Waal. Among the first settlers that embarked on the ship "Nieu Nederlandt" in 1624 were 30 Walloon families. The Dutch word "wal" can be translated as "rampart". However, even some English maps show the name as Waal Straat, and not as Wal Straat.

Stock market

A stock market or equity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares); these may include securities listed on a stock exchange as well as those only traded privately.

Size of the market

Stocks can be categorized in various ways. One common way is by the country where the company is domiciled. For example, Nestlé and Novartis are domiciled in Switzerland, so they may be considered as part of the Swiss stock market, although their stock may also be traded at exchanges in other countries.

At the close of 2012, the size of the world stock market (total market capitalisation) was about US$55 trillion. By country, the largest market was the United States (about 34%), followed by Japan (about 6%) and the United Kingdom (about 6%). This went up more in 2013.

Stock exchange

A stock exchange is a place or organization by which stock traders (people and companies) can trade stocks. Companies may want to get their stock listed on a stock exchange. Other stocks may be traded "over the counter", that is, through a dealer. A large company will usually have its stock listed on many exchanges across the world.

Lehman Brothers

Lehman Brothers Holdings Inc. (former NYSE ticker symbol LEH) /ˈliːmən/ was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), doing business in investment banking, equity and fixed-income sales and trading (especially U.S. Treasury securities), research, investment management, private equity, and private banking. Lehman was operational for 158 years from its founding in 1850 until 2008.

On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of assets by credit rating agencies, largely sparked by Lehman's involvement in the subprime mortgage crisis and subsequent allegations of negligence and malfeasance.Lehman's bankruptcy filing is the largest in US history, and is thought to have played a major role in the unfolding of the late-2000s global financial crisis. The following day, Barclays announced its agreement to purchase, subject to regulatory approval, Lehman's North American investment-banking and trading divisions along with its New York headquarters building. On September 20, 2008, a revised version of that agreement was approved by U.S. Bankruptcy Judge James M. Peck. The next week, Nomura Holdings announced that it would acquire Lehman Brothers' franchise in the Asia-Pacific region, including Japan, Hong Kong and Australia, as well as Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. The deal became effective on October 13, 2008.