Analysts claim that some of the earliest symptoms of recession were evident in 2007 itself but were ignored by all concerned.
In USA, it was the Dow that rang the first warning bell when subsequent to having peaked in October 2007, it slipped into a steep decline. Although it did begin recovering by March 2009, what was truly alarming was the fact that it had fallen by more than 50%, thus drawing a parallel with the stock market decline during the 1930s' recession.
Likewise, in UK, the first alarming incident occurred in August, 2007, when a major financial institution blocked three withdrawals citing evaporation of liquidity. Unfortunately, this was ignored by most observers only to realize that it was an apt mirror of the crisis that was waiting in the wings to happen.
Tracing the Collapse
While the heat of oncoming crisis was evident during the second half of 2007 itself, people still believed the irregularities as being stray incidents and hence did not regard them as being reflective of a large-scale financial crisis. Most observers and analysts had sufficient faith in the market to believe that the system was strong enough to sustain a few losses and that the economy would continue to progress as before. However, this was not to be and it was the California based financial company named IndyMac that drove home the truth.
The IndyMac Story
Established in 1985 by Countrywide Mortgage Investment in Los Angeles, IndyMac was meant to serve as a bank that specialized in creating savings and facilitating loans. While in the city it was the largest institution in its category, it ranked seventh in the country as far as dealing with mortgages was concerned. Inspiration underlying the founding of this company was to collateralize loans that were too big to be pushed through the regular channels. To this effect, the company continued as an off-shoot of its parent company till 1997 after which it became an independent entity and continued to function as one till it filed for bankruptcy in 2008.
During its years of functioning, IndyMac followed an aggressive strategy wherein it adopted non-traditional approaches of offering loans. As a result, most of the times, loans were provided to people without verifying their assets or ability to pay or borrowers who already had a poor credit history. Appraisals sought by the company on collaterals were also untrustworthy and tyhe objective was to customize the loan as per the requirement of the borrower irrespective of his financial situation. Having tasted success on this front, the management of the company did not see any reason for altering its approach in terms of conforming to regulations or adopting stricter measures for issuing loans.
It was owing to this over-dependence on the secondary mortgage market that IndyMac suffered its first big blow when real estate prices crashed in 2007. Rather than improving, the situation worsened in 2008 and as its liquidity continued to decline, its collapse was imminent. 7th july 2008 was the historic day when IndyMac announced that all its attempts to raise capital had failed and that the bank no longer belonged to the elite club of being 'well capitalized. Not even a month had passed when on 31st July 2008, it filed for bankruptcy and closed its doors forever, its downfall being attributed to unsafe practices and unsound financial policies.
Subsequent to crashing of IndyMac, the first to be affected were companies that were directly involved with the bank, like its parent company Countrywide Financial, or those which were major players in the mortgage and construction segments of real estate. From 2007 to 2008, several financial institutions collapsed with October 2008 being witness to some of the greatest downfalls. World renowned institutions like Lehman Brothers, Fannie Mae, Citigroup and Merrill Lynch all became victims of what was termed as one of the largest collapses the financial markets had witnessed since 1930.
On its part, the US Government responded almost immediately by extending the duration of insurance and introducing several programs wherein the Federal Reserve would purchase the commercial papers. With one big name crashing after another in what seemed like a never-ending chain, top ranking officials decided to hold an emergency meeting on wherein Ben Bernanke, Chairman of the Federal Reserve pushed the landmark decision of allocating $700 billion for the purpose of bailing out companies.
By the time it was 2009, almost one-third of the total sources of lending in USA had been immobilized and continued to remain so courtesy of what economists referred to as the shadow banking system.
Such was the intensity of collapse that the tremors reverberated across the Atlantic Ocean all the way to Europe, causing stock markets to crash and multiple financial institutions to close down. Many of the existing financial institutions lost out on the liquidity front and this in turn had a negative bearing on international trade. The following months were witness to a evolving of currency crisis with investors shifting their funds into traditionally strong currencies, thus leaving emergent economies with little choice but to borrow from the IMF.