The widely watched Dow Jones Industrial Average hit its all-time high on October 9, 2007, closing at 14,164.43. Less than 18 months later, it had fallen more than 50% to 6,594.44 on March 5, 2009. This wasn't the largest decline in history -- during the the Great Depression, the stock market took a 90% hit. However, it was more vicious -- it took only 18 months, while the fall during the Depression took over three years. What caused the 2008 stock market crash? Follow this timeline to understand exactly how it happened.
2007The Dow opened the year at 12,459.54. It rose fairly steadily throughout most of the year, despite concerns about a slowdown in the over-heated housing market. In fact, there had been warning signals as early as 2006 that the housing market was starting to falter thanks to subprime mortgages. However, government officials didn't think the housing slowdown would affect the rest of the economy.
By August 2007, the Federal Reserve recognized there was a bank liquidity problem. It began adding liquidity by selling its reserves of Treasuries and accepted subprime mortgages from the banks as collateral. Shortly after the Dow hit it peak, some economists warned about the potential general impact of widespread use of collateralized debt obligations and other derivatives. By late November, Treasury Secretary Hank Paulson launched a bank-funded Superfund to purchase toxic debt. However, as the year drew to a close, the BEA revised its estimate of third quarter GDP growth, (Gross Domestic Product) up to a phenomenal 4.9%. It seemed the healthy U.S. economy could shrug off a housing downturn, and financial market liquidity constraints, as 2007 drew to a close. The Dow ended the year just slightly off its October high, at 13,264.82.
2008By the end of January, the BEA announced that GDP growth was a paltry .6% for the fourth quarter of 2007. The economy lost 17,000 jobs, the first time since 2004. The Dow shrugged off the news, and hovered between 12,000-13,000 until March. On March 17, the Federal Reserve intervened to save the failing investment bank Bear Stearns, the first casualty of the subprime mortgage crisis. The Dow dropped to an intra-day low of 11,650.44, but seemed to recover. In fact, many thought the Bear Stearns rescue would keep markets from sliding below 20% of the October high, and avoid a bear market. In fact, by May the Dow rose above 13,000 again and it seemed the worst was behind us.
However, in July 2008 the subprime mortgage crisis had spread to government sponsored agencies Fannie Mae and Freddie Mac, requiring a Federal government bailout. The Treasury Department guaranteed $25 billion in their loans and bought shares of Fannie's and Freddie's stock, while the FHA to guaranteed $300 billion in new loans. The Dow closed on July 15 at 10,962.54, before bouncing back above 11,000 for the rest of the summer.
September 2008The month started with chilling news -- On Monday, September 15, 2008, Lehman Brothers declared bankruptcy. The Dow dropped 504.48 points.
On Tuesday, the Federal Reserve announced it was bailing out insurance giant AIG with an $85 billion "loan" in return for 79.9% equity, effectively taking ownership. AIG had run out of cash in its attempt to pay off credit default swaps it had issued against mortgage-backed securities.
On Wednesday, money market funds lost $144 billion as investors panicked, and switched to ultra-safe Treasury notes. The Dow fell 449.36 points.
On Thursday, markets rose 400 points as investors learned about a new bank bailout package. On Friday, the Dow ended the week at 11,388.44 -- slightly below its Monday open of 11,416.37.
On Saturday, September 20, Hank Paulson and Ben Bernanke sent the $700 billion bailout package to Congress. The Dow bounced around 11,000 until September 29, when the Senate voted against the bailout bill. The Dow fell 777.68 points, the most in any single day in history. (Source: CNN Money, Stocks Crushed, September 29, 2008)
Congress finally passed the bailout bill in early October, but by now panic had set in. The Labor Department reported that the economy had lost a whopping 159,000 jobs in the prior month. On Monday, October 6, the Dow dropped 800 points, closing before 10,000 for the first time since 2004. The Federal Reserve fought the ongoing banking liquidity crisis by lending $540 billion to money market funds, coordinating a global central bank bailout, and lowering the Fed funds rate to just one percent. However, the LIBOR bank lending rate rose to its high of 3.46%.
The Dow responded by plummeting 13% throughout the month. By the end of October, the BEA released more sobering news -- the economy had contracted .3% in the third quarter. The nation was in recession. (Source: CNN Money, The Week That Broke Wall Street, October 6, 2008)
November 2008The Labor Department reported that the economy had lost a staggering 240,000 jobs in October. The month revealed more bad news. The AIG bailout grew to $150 billion, Treasury announced it was using part of the $700 billion bailout to buy preferred stocks in the nations' banks, and the Big 3 automakers asked for a Federal bailout, as well. By November 20, 2008, the Dow had plummeted to 7,552.29, a new low. However, the stock market crash of 2008 was not yet over.
December 2008The Federal Reserve dropped the Fed funds rate to zero, its lowest level in history. The Dow ended the year at a sickening 8,776.39, down nearly 34% for the year.
The Dow climbed to 9,034.69 on January 2, 2009 in a burst of optimism that the new Obama Administration could tackle the recession with his team of economic advisers. However, continued bad economic news sent the Dow down to 6,594.44 on March 5, 2009 -- its true market bottom.
Soon afterwards, Obama's economic stimulus plan started to create the confidence needed to stop the panic. On July 24, 2009, the Dow reached a higher high, closing at 9,093.24 and beating its January high. For most, the stock market crash of 2008 was over.
However, the scars remained and investors remained skittish throughout the next four years. On June 1, 2012, panicked over a poor May jobs report and the eurozone debt crisis, they piled into ultra-safe Treasuries. The Dow dropped 275 points, and the 10-year benchmark Treasury yield dropped to 1.443 during intraday trading. This was the lowest rate in more than 200 years. This indicated that the confidence that eroded during 2008 had not yet returned to Wall Street. Article updated June 8, 2012