The Stock Market Crash of 2008 started a decline in which the Dow Jones Industrial Average fell 1,874 points or 18.1%. The Dow Jones Industrial Average decreased by almost 778 points, the largest noted single-day point loss recorded. This took out almost $1.2 trillion in market value, the first trillion dollar day to exist The Dow Jones Industrial Average lost 777.68, more than the 684.81 loss on September 17, 2001, which was the first trading day following the September 11 attacks. (Dow Jones Industrial Average.) Standard & Poor's 500 index lost 8.8% while Nasdaq fell 9.1%, the worst day on a percentage basis and worst decline since the crash of '87. Many arguments have been made to identify the exact cause of the crash such as poor credit, home prices and homeowner's equity. (Money-Zine.) After the 2008 crash, stocks continually tumbled.
A probable cause for the Stock Market Crash of 2008 was poor credit. Prior to the years of the stock market collapse, the mortgage industry was in trouble. As mortgage loans started to rise, the national economy started to fall, which affected the credit markets. Regardless of the efforts of the Federal Reserve, the uproar of the credit market expanded to the national financial system. Credit lenders began to be concerned that borrowers would not be able to pay back their loans. Bear Stearns was the first investment bank to be a victim. As investment firms continued to have this fear, they began pulling money back from Bear Stearns. (Money-Zine.) Bear Stearns sold itself to JPMorgan Chase for $2 a share which was a 93% discount. Bankers quickly sealed the deal before financial markets opened overseas due to increasing fears that the financial crisis could spread if Bear Stearns did not find a buyer. JP Morgan paid $36 million for the firm, including its headquarters on Madison Avenue in Manhattan. (Jr. Thomas.)
“On March 13, 2008, Bear Stearns advised the Federal Reserve that its liquidity position had deteriorated, and that it would file for bankruptcy unless alternative sources of funds were made available. Two days later, Bear Stearns agreed to merge with JP Morgan Chase in a deal that wiped out 90% of Bear Stearns market value.” (Money-Zine.)
This showed a collapse that would destroy the financial system, JP Morgan buying the firm for a third of the price it was worth since it went public in 1985. (Jr. Thomas.) By 2008, the year of the market crash, the Federal National Mortgage Association and the Federal Home Mortgage Corporation had almost six million in mortgage loans. With a mortgage crisis taking place in the United States, these corporations began showing the affects of financial hardships. On September 7, 2008, the Federal Housing Finance Agency put Fannie Mae and Freddie Mac (both housing assistances) under them to maintain and improve their condition. The U.S. treasury department gave funds to help these companies. While doing so, this raised the national debt to a whopping $800 billion. (Money-Zine.) A probable cause for the Stock Market Crash of 2008 was poor credit.
Many conclusions have been drawn to give reason for the Stock Market Crash of 2008. A probable cause to the Stock Market Crash of 2008 was home prices. The “Black Week” began on October 6th and lasted for five trading conferences. During that time, the Dow Jones Industrial Average would decline by 18.1% and the S&P 500 (equities market) would decline by 20%. (Twin.)
“The credit market's problems began when housing prices started to fall in 2007. Homeowners frequently found themselves with underwater loans. They owed lenders more than the home was worth. When faced with these facts, homeowners no longer feared the threat of foreclosure. Even more disturbing was the fact that some families abandoned their homes; choosing to start their lives anew elsewhere rather than worry about paying off their debts.” (Money-Zine.)
Companies allowed people to borrow money that had bad credit and were unable to pay back loans. This caused U.S. banks to fall due to the simple reason that they lent more money than the banks had due to the price of housing at the time. Naturally, shareholders did not want their money invested in bank shares and chose to sell their shares. This created a domino effect around the stock market and stocks began to fall. A recession was later to follow and the easiest way to bail out the banks was to get them to start spending money again. Interest rates were cut to make establish new businesses and encourage people to start spending money again. Many conclusions have been drawn to give reason for the Stock Market Crash of 2008. (Stock Market Crash 2008.) A probable cause to the Stock Market Crash of 2008 was home prices.
Home equity was another proposed cause of The Stock Market Crash of 2008. On September 14, 2008, Bank of America agreed to overtake Merrill Lynch (financial management company) for $50 billion. On September 15, 2008, many feared that financial corporations would not be able to cover the loan market and credit default swaps which continued. This only continued to disrupt the market. Occurring on the same day, Lehman Brothers was forced to file for bankruptcy protection. (Money-Zine.)
“After a brief uptick in mid-October, the market would begin a second decline later in that same month. On October 24th, the Dow would fall 312.30 points to 8,378.95. This was its lowest level since April 25, 2003. The S&P 500 would fall 31.24 to 876.77, its lowest level since April 11, 2003. Finally, the Nasdaq Composite would fall 51.88 points to 1,552.03, its lowest level since May 23, 2003. “ (Money-Zine.)
Lenders were running out of options. They could not afford to write loans as long as the homeowner's equity would place them in more debt. If buyers were not able to repay their loans back to the bank, lenders were able to foreclose on the home. During “Black Week,” however, the Dow Jones Industrial Average dropped about 22%, rebounded and then fell again by 200 points. (Twin.) Home equity was another proposed cause of The Stock Market Crash of 2008.
The Stock Market Crash of 2008 started a decline in which the Dow Jones Industrial Average fell 1,874 points or 18.1%. The Dow Jones Industrial Average decreased by almost 778 points, the largest noted single-day point loss recorded. (Dow Jones Industrial Average.) This took out almost $1.2 trillion in market value, the first trillion dollar day to exist. The Standard & Poor's 500 index declined 8.8%, its seventh worst day ever and the largest single day percentage drop. Many arguments have been made to identify the exact cause of the crash such as poor credit, home prices and homeowner's equity. (Money-Zine.) After the 2008 crash, stocks continually tumbled.
Works Cited
“Dow Jones Industrial Average (DIJA) History.” FedPrimeRate.com. 2010. 5 Jun. 2011. http://www.nyse.tv/dow-jones-industrial-average-history-djia.htm.
Jr. Thomas, Landon and Sorkin, Ross Andrew. “JP Morgan Acts to Buy Ailing Bear Stearns at Huge Discount.” The New York Times. 16 Mar. 2008. 5 Jun. 2008. http://www.nytimes.com/2008/03/16/business/16cnd-bear.html.
“Stock Market Crash 2008.” Shares Explained.com. 5 Jun. 2011. http://www.sharesexplained.com/additonalmaterial/stock-market-crash-2008.html.
“Stock Market Crash of 2008.” Money-Zine.com. 2008-2011. 5 Jun. 2011. http://www.money-zine.com/Investing/Stocks/Stock-Market-Crash-of-2008/.
Twin, Alexandra. “Stocks crushed.” CNN MONEY. 29 Sept. 2008. 5 Jun. 2011. http://money.cnn.com/2008/09/29/markets/markets_newyork/index.htm.