Facts
At the end of 2006, US real estate prices started to slow down.

On July 2007, BNP Paribas, a French global bank, declared it was unable to evaluate its funds because of a default rate of subprime credit, which had been put into these funds by means of securitisation. In August 2007, massive selling flowed into the market, and this created tension and problems for the operators who had a small amount of capital (contagion). In August, the US president Bush announced a plan to help households in trouble with their mortgages, but this plan did not help intermediaries. Interbank interest rates spiked, like Euribor and Libor, and the market dried up. In fall 2007, the US Federal Reserve started to cut short-term interest rates, from 4% to 1%. In March 2008, Bear Sterns, a financial non-banking intermediate, was purchased for the symbolic amount of $ 2 per share by JP Morgan, after authorisation from the US Federal Reserve. The cause of the default was the loss of value of its subprime credits, in the absence of adequate capital. After Bear Sterns, the Fed decided to enter directly the market and to act as counterpart for troubling intermediaries; interbank interest rates started to decrease only in 2009. In September 2008, Fannie Mae and Freddie Mac, two public mortgage agencies, bankrupted and the Government nationalised them. They had purchased an amount of subprime mortgages ranging from 40 to 80 billion dollars per year in the period 2001-8. On Friday 13 September 2008, Lehman Brothers bankrupted and it was not rescued. Fifty thousand people lost their jobs, and no public plan to help was put in place. The Asian and European branches (independent from the American firm) were bought by Nomura, a Japanese investment bank. During 2009, the negative effects of the crisis produced a strong reduction in production, employment, consumption, and income, generating a bitter economic crisis. The World GDP slowed down to unexpected levels. So far, rescue plans by governments have been based on massive public spending, to avoid a hard landing. The G20 has been trying to find a consensus over the global legal standard on financial markets and operators.
The US Federal Reserve in its statistical division of St. Louis gives interesting updated statistics on the economic situation (https://research.stlouisfed.org/economy/). Because of the massive public spending and excessive debt, two European countries have almost bankrupted in 2010 (Ireland and Greece), and the EU and the International Monetary Fund (www.imf.org) have intervened to save them. In 2011, central banks will have to figure out what is the exit strategy to avoid soaring inflation, which finally hits the productive system that has already paid the cost of banks and country rescues.

Bibliography
BERNANKE B., The Subprime Mortgage Market, speech at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois, May 17, 2007.
CHOMSISENGHET S. and  PENNINGTON-CROSS A.,The evolution of the subprime market, St Louis Federal Reserve Review, January 2006.
GRAMLICH E., Subprime Mortgage Lending: Benefits, Costs, and Challenges, remarks at the Financial Services Roundtable Annual Housing Policy Meeting, Chicago, Illinois, May 21, 2004.

Editor: Chiara OLDANI
© 2010 ASSONEBB