The date was October 29, 1929. The stock prices plummeted at the stock exchange with signs of recovery growing out of sight. Banking institutions faced the austerity of bankruptcy as they have invested a large portion of their punter’s money in the doomed stock exchange. These banks were forced to close down as the stock market crashed. Consequently, the people rushed to their banks to withdraw all their accounts. This wide withdrawal caused other banks to forcibly close as well. The already worsened condition snowballed as businesses and other companies were greatly affected through the crash of the stock market, and the closure of the banks. This prompted them to lose capital. To save money, the businesses were forced to lay-off their employees, and cut down the hours of their labor. Unemployment reached record highs, and panic ravaged the streets of the United States. This date in United States history will forever be marked as the “Great Depression.” The stock market has provided an image as the most definite path towards affluence. However, as the tables turned upside down, it proved itself to becoming otherwise.
The United States has pledged that this “dark age” will no longer happen. However, because of capitalism’s nature of instability, this grim history has repeated itself yet again with the recent occurrence of the Global Financial Crisis.
The recent episode began when the 158-year old giant investment bank Lehman Brothers announced their bankruptcy. Lehman Brothers’ stock prices plummeted caused by the huge write-down on the troubled mortgage portfolio of the bank as their sub-prime borrowers defaulted. In order to reinstate liquidity and replenish the balance sheet, Lehman Brothers organized talks with the United States Federal reserve and the United States Bureau of Treasury for them to help Lehman Brothers seek a buyer that will purchase the troubled institution. Three financial institutions were lined up that were set to buy Lehman Brothers: the Korean Development Bank, Barclay’s, and the Bank of America. However, all of the three pulled out from the talks which left Lehman Brothers without a buyer, and forced Lehman Brothers to file for protection under Chapter 11 of the United States Bankruptcy Code for their reorganization.
Unfortunately, Lehman Brothers was not the only troubled institution at that time. Aside from Lehman Brothers, several financial institutions also suffered excessive write-down’s. Merrill Lynch, a huge rival of the Lehman Brothers, also experienced a sharp decline in their stock prices, write down’s, and credit losses which amounted to $52 billion. The day before Lehman Brothers filed for bankruptcy, Merrill Lynch agreed to a sale agreement with the Bank of America for $50 billion.
Another troubled financial Institution is the American International Group or better known as the AIG, the world’s largest insurer. The AIG also found itself in the financial predicament brought about by its $441 billion total derivatives exposure in credit default swaps – a form of insurance against the risk of bond default. The AIG has sold 79.9 % of its equity to the United States Federal Reserve, and sustained accredit rating downgrades from Moody’s and Standard and Poor’s.
More recent was the $326 billion dollar bailout of the United States Government for Citigroup Inc. The Bank has lost $160 billion of market Capitalization for the past year brought about by the continuous decline in their stock price reaching a record 16- year low. The bailout of the US government amounts to $20 billion in capital infusion and $306 billion worth of government guarantees.
The Global Financial Crisis that occurred this 21st century is very much the same with what had happened during the great depression of the 1930’s. Unemployment reached record highs, and panic ravaged the streets of countries the world over. The gravity of the recent Global financial crisis even required the intervention of governments. Nevertheless, the topmost priority of the society in such instances is to ensure the integrity of the market – to guarantee that the market system is in full shape to be able to function well within a society, and to ensure that the market is operating fairly and safely in order to encourage the widest possible confidence in them, thereby promoting high levels of savings and investment. With that said, the capitalists must weigh all their decisions impartially to ensure that market integrity is met, and to make sure that Global Financial Crises at this degree will not happen again.
20th century history from: http://history1900s.about.com/od/1930s/p/greatdepression.htm
The Guilder. A newsletter of the College of Business Administration of the University of the Philippines. Volume IV. Issue 1.