Читать книгу Financial Security For Dummies - Eric Tyson - Страница 32

With the United States winning the war on terrorism and companies hiring again and corporate profits snapping back, stock prices rebounded and hit new highs in late 2006 and into 2007. Unfortunately, not many years into its recovery, the economy was about to hit even rougher times and a more severe crisis.

The real estate sector had continued to do well in most parts of the country through the prior recession and in the aftermath of the terror attacks. Lenders were encouraged and incentivized to make loans to increasingly risky borrowers — that is, borrowers with little to no down payment and/or mediocre credit scores and reports. These higher-risk mortgages were known as sub-prime mortgages — sub-prime refers to the borrowers having below prime credit reputations. Despite sub-prime mortgages’ obviously higher risk during a real estate market downturn, major credit rating agencies handed out AAA ratings on these risky securities, which fostered the appetite for them among financial institutions.

Sub-prime mortgages and other real estate–related securities ended up on the balance sheets of important and often highly leveraged financial institutions, including investment banks, commercial banks, insurers, and so on. When real estate prices began falling in many parts of the United States in 2006, 2007, and into 2008, the value of these sub-prime mortgages got crushed, and that dragged down the financial institutions that owned lots of them. This led to bankruptcies (such as American Home Mortgage, IndyMac, Lehman Brothers, and New Century) and the merger of failing firms into stronger firms (for example, Countrywide Financial and Merrill Lynch were bought by Bank of America; Bear Stearns was bought by J.P. Morgan). Numerous banks and other financial institutions received emergency government loans to stay afloat.

As layoffs began to mount and home values fell, consumers increasingly felt squeezed and reduced their spending, which added to the economic slide. Lenders hit with real estate–related loan losses pulled back on other lending. Unemployment eventually reached 10 percent, the highest rate since the early 1980s recession.

From its late-2007 peak to its early-2009 bottom, stocks suffered their worst bear market since the Great Depression with the Dow Jones Industrial Average dropping 55 percent.