Last week marked the beginning of the fifth anniversary of the financial crisis. In the first week of that fateful September, four investment banks vanished (Lehman Brothers declared bankruptcy, Bank of America swallowed the ailing and near-failing Merrill Lynch, and Goldman Sachs and Morgan Stanley were forced to become bank holding companies in order to access the government's discount window); the government bailed out global insurance giant AIG; there was panic in the money market fund industry after the Reserve Primary Money Fund "broke the buck," dropping below the standard $1 per share valuation; and the Treasury Department introduced the first version of TARP, which was intended to grant the government the authority to purchase $700 billion of mortgage-related assets for two years.
The subsequent week saw fewer big deals, but two major events framed the action. On September 25, 2008, the Office of Thrift Supervision closed Washington Mutual Bank. JP Morgan Chase then acquired the banking operations of Washington Mutual in a transaction facilitated by the FDIC. Days later on September 29, the U.S. House of Representatives rejected legislation submitted by the Treasury Department requesting authority to purchase troubled assets from financial institutions.
In reaction to the TARP vote, markets plunged, with the Dow slumping nearly 778 points (7 percent) in the biggest single-day point loss ever. The S&P 500 lost 8.8 percent, its seventh worst day ever on a percentage basis and the biggest one-day percentage drop since the crash of 1987. The NASDAQ composite fell 9.1 percent, its third worst day on a percentage basis and also its worst decline since '87.
Last week, I discussed the financial crisis' impact on jobs, income, the economy, stocks and housing -- in other words, the things that affect your financial bottom line. This week, we focus on where the government stands on a variety of initiatives.
Bailouts: The government used extraordinary measures to save the financial system, including directly bailing out the financial and automobile industries. Of course, there were plenty of other measures that indirectly helped, like providing financing through the Federal Reserve's discount window for U.S. banks, European banks and even for industrial conglomerates like General Electric. Here's the accounting for some bailouts of note:
-- Fannie Mae/Freddie Mac: $188 billion bailout, of which the companies are expected to return $146B in dividends by September 2013.
-- GM and Chrysler: Of $80B committed, $51B repaid.
-- TARP: Of original $700B, most has been repaid. CBO puts the eventual tab to taxpayers at $21B.
-- AIG: Fed and Treasury committed $182B, with taxpayers estimated to be fully repaid, plus $23B.
Regulatory: The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010, but lawmakers left a lot of the hard work to regulators. According to law firm Davis Polk, as of September 3, 2013, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 172 (61.4 percent) have been missed and 108 (38.6 percent) have been met with finalized rules. In addition, 160 (40.2 percent) of the 398 total required rulemakings have been finalized, while 126 (31.7 percent) rulemaking requirements have not yet been proposed.
Who paid what? There have been billions of dollars worth of penalties, which were levied as a result of the financial crisis. Among the biggies, the SEC has collected $2.73B, and the national mortgage settlement will rake in $25B from the nation's five largest mortgage servicers.
Bottom Line: Just in time for the five-year anniversary, the Federal Reserve Bank of Dallas released a sobering assessment estimating the cost of the crisis: "Our bottom-line estimate ... assuming output eventually returns to its precrisis trend path, is an output loss of $6 trillion to $14 trillion. This amounts to $50,000 to $120,000 for every U.S. household."
Ouch! Even the low end of that estimate hurts. Unfortunately, the legacy of the financial crisis will be with us for years to come.
(Jill Schlesinger, CFP, is the Emmy-nominated, Senior Business Analyst for CBS News. A former options trader and CIO of an investment advisory firm, Jill covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." She welcomes comments and questions at firstname.lastname@example.org.)
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