Economic history · The 2008 Financial Crisis
Nine steps, about fourteen minutes, a question at each and one decision you take yourself. You need no economics and no preparation, only a willingness to guess before you are told.
British banks were brought down by borrowing they had to find again every few months, not by the American bonds they owned, and the first to fail waited five months while three bodies worked out who decided.
In March 2008 Bear Stearns could not fund itself and was sold, with the Federal Reserve paying for the deal. In September the two mortgage companies the American government had always been assumed to stand behind were taken over. Eight days after that, Lehman Brothers ran out of money too.
You will be asked to make the American authorities' decision yourself, over the weekend of 13 and 14 September 2008, knowing only what was known then. You find out what was actually done, and hear the argument that has run ever since about whether anything else was lawful, only after you have chosen.
Nine steps take it in order: the firm whose sale the Federal Reserve paid for, the two that were taken over, the weekend, the argument about the law, the insurance company lent to the next day, who a central bank may lend to, the dollars sent to other central banks, what the Bank of England took in at home, and the one measure that lent nothing at all.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 9
Bear Stearns was one of the five largest American investment banks, which trade and lend for companies and governments and hold no savings for the public. It could not fund itself in March 2008 and did not go bankrupt.
A bank that holds people's savings is covered by rules that name the public body responsible when it fails. Bear Stearns held no savings, so no rule made anybody responsible for it, and nothing said it would be helped at all.
A bank can be sound and still run out of cash on a particular morning: what it owns is lent out for years, and what it owes can be demanded today. Selling in a hurry raises less than the assets are worth. A central bank can create the currency it issues, so it can lend against those assets until the panic passes and take its money back afterwards.
Put it another way. Think of it like being asked to settle a bill today when everything you own is a house you cannot sell until next year: you own more than the bill and you still cannot pay it.
The Federal Reserve Board, which runs America's , met on Sunday 16 March 2008 and announced a new lending scheme. It was for the firms that trade government debt directly with the central bank, and it opened the following morning.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
Bear Stearns ran out of money in March 2008 and did not fail. What did the Federal Reserve do?
For scale. The Federal Reserve had not lent widely to firms outside banking since the 1930s, seventy years earlier.
On 7 September 2008 the American government took control of Fannie Mae and Freddie Mac, the two mortgage companies it had always been assumed to stand behind.
Neither company lent to households itself: each bought mortgages from the banks that did, and promised to pay the investors who bought them if the households stopped paying. The American mortgage market ran on that promise.
Taking control of a failing company without buying it is called . The government appointed the managers and took the powers the owners had.
Owners' money is what the people who own a company have put in and left there, and losses come out of it before the lenders lose anything. The commission Congress set up later worked out how much lending the two companies carried for each dollar of it.
The people who had lent to the two companies went on being paid. The people who owned them kept shares that paid nothing.
By the end of 2007, for every dollar of their owners' money, how many dollars of loans did Fannie Mae and Freddie Mac own or guarantee between them?
For scale. The same commission put the five largest American investment banks at up to $40 of loans and other assets for each dollar of their owners' money.
Lehman Brothers, another of the five largest American investment banks, could not fund itself in September 2008. It needed either a buyer or a loan by Monday morning.
The Federal Reserve had been lending to firms like it since March, under an emergency lending law: the one law that lets it lend to something that is not a bank. It may lend only if the borrower pledges something valuable, called collateral, and only if the collateral is good enough.
Lehman was the fourth largest American investment bank, holding $639 billion of assets. One slice of that was property, and bonds built out of the payments on property: $111 billion at the end of 2007. That slice on its own was more than four times the whole of its owners' money.
Investors lend to all these firms and cannot tell which one is next, so a failure here may stop that lending everywhere at once.
You are among the American authorities over the weekend of 13 and 14 September 2008. Lehman Brothers cannot fund itself on Monday, no buyer has agreed to take it, and the table above is what you have. What do you do?
No rescue was arranged. On 15 September 2008 Lehman Brothers asked an American court for bankruptcy protection, which freezes what a firm owes while the courts work out who gets what.
What followedCongress later set up a commission to examine the crisis. It judged that this run of decisions, two rescues, one refusal and a loan to an insurance company the next day, increased uncertainty and panic in the market.
Bear Stearns had been sold in March with the Federal Reserve paying for the deal. Lehman came six months later, a week after two far larger firms had been taken over, and no public money went into it at all.
Size did not separate the two. One was rescued and the other was not.
Lehman Brothers filed for bankruptcy on 15 September 2008, and people have argued ever since about whether the Federal Reserve could lawfully have lent to it instead.
The emergency lending law allows the Federal Reserve to lend only against collateral pledged to it. The collateral must also be good enough in the lender's own judgement, so a firm with nothing left to pledge cannot be lent to under it.
The same law had been used for Bear Stearns six months earlier, and was used again within a week of Lehman Brothers filing.
Why did the American authorities say they had not rescued Lehman Brothers?
For scale. The same law had been used for Bear Stearns six months earlier, and was used again the day after Lehman filed.
On 16 September 2008 the Federal Reserve lent to American International Group, known as AIG, an insurance company it had no responsibility for.
The Board authorised the Federal Reserve Bank of New York to lend up to $85 billion, under the same emergency lending law that had been used for Bear Stearns. The Federal Reserve said it acted with the full support of the Treasury, the American government's finance department.
AIG took no deposits and was not a bank, and the Federal Reserve had never been responsible for looking at its accounts.
Until 2008 the Federal Reserve lent to banks. After September it was lending to a firm that sold insurance.
The first loan to AIG was for up to $85 billion. What did the whole commitment to it come to at its maximum?
For scale. The most AIG ever actually had at one time was $141.8 billion, in April 2009. The government also took a 79.9 per cent stake in the company.
In 2008 the Federal Reserve built new lending schemes in a matter of months, using an emergency lending law that had sat almost unused since the 1930s.
The law had been written for an emergency and then left alone for seventy years. Its wording turned out to reach much further than the banks the Federal Reserve had spent those seventy years looking after.
The scheme for the firms that trade government debt opened on 17 March 2008, and none of them held savings for the public. An insurance company was lent to in September.
What was new about the Federal Reserve's lending in 2008?
The Federal Reserve lent dollars to other central banks, which lent them on to the banks in their own countries.
Each arrangement is a swap. The Federal Reserve gives the other central bank dollars and takes its currency, and the two exchange them back on a set date. The dollars are borrowed rather than given, and the other central bank, not the banks it passes them to, owes them back.
The most the Bank of England owed at any one time under one of these arrangements was $74 billion, in October 2008.
The most the Bank of England owed at any one time was $74 billion. Was the European Central Bank's figure higher or lower?
A tie counts as correct either way.
For scale. The total the Federal Reserve had authorised for other central banks grew from $24 billion in December 2007 to nearly $620 billion after Lehman Brothers filed.
Go back to 21 April 2008, when the Bank of England began letting British banks give it mortgage bonds and take UK Treasury bills, which are short-term government debt, in exchange. It called each exchange a swap, and no dollars and no other country were involved.
A mortgage bond in 2008 could not be sold at all, and a Treasury bill can be sold for cash on any day. The Bank of England did not buy the bonds, and responsibility for losses on the home loans behind them stayed with the banks.
A Treasury bill is a promise from the government to pay a set sum on a set date less than a year away. Whoever holds one knows exactly what it is worth and when, so there is always somebody willing to buy it. A bond built out of mortgage payments is worth whatever the households behind it turn out to pay, and by 2008 the buyers had gone. The bank still owned its mortgage bonds. It could no longer turn them into cash.
Each swap ran for one year and could be renewed for up to three years, and banks went on making new ones as the first expired. Only the highest-graded bonds backed by British and European home loans were eligible, and only where the loans had already been made by the end of 2007.
The Bank of England announced this in April 2008 as a temporary measure. For how many years did it go on?
For scale. At its peak the scheme had lent £185 billion of Treasury bills, more than twice the size of the Bank of England's balance sheet before the crisis.
The lending ran to hundreds of billions of dollars in 2008, and the runs went on: savers and lenders kept demanding their money back all at once.
Lending to a bank gave it money to pay whoever demanded it first, and gave the people behind them no reason to wait.
A run is a race. Anyone who doubts that a bank can pay them all wants to be paid before the money runs out, and the people at the back of the queue are the ones who lose. A government that promises to pay whoever the bank cannot takes away the reason to be first. Once the queue has gone there is nothing to pay out, which is why a promise can be far larger than anything a government could afford.
On 14 October 2008 the Federal Deposit Insurance Corporation, the American body that runs , guaranteed newly issued bank debt and business accounts that paid no interest.
Governments can therefore promise more than they could ever pay, and in October 2008 they made that promise.
Three of these are loans. Which one is not?
Module 4 of 7 in The 2008 Financial Crisis
Bear Stearns, March 2008
sold to another bank, with the Federal Reserve paying for the dealFannie Mae and Freddie Mac, end of 2007
75 dollars of loans owned or guaranteed for every dollar of their owners' moneyThe weekend of 13 and 14 September 2008
$639 billion of assets, no buyer, no rescue, and a bankruptcy filing on the 15thWhy there was no rescue
the authorities said Lehman had nothing good enough to pledge, and that is still arguedAIG, from 16 September 2008
up to $85 billion at first, and about $182.3 billion committed at the maximumWho the Federal Reserve could lend to
any individual, partnership or corporation, under a law from the 1930sDollars lent to other central banks, at their largest
$291 billion to the European Central Bank, $122 billion to the Bank of Japan, $74 billion to the Bank of EnglandThe Bank of England's swaps, from 21 April 2008
mortgage bonds for Treasury bills, renewable for up to three years, and the last expired in January 2012What stopped the runs
a promise to pay, not a loanYou met three terms in this module
, ,
Every rescue made the next one harder to refuse, and the one measure that stopped the runs was the one that lent nothing.
[1] What was done for Bear Stearns, and the new lending facility of the same day: Board of Governors of the Federal Reserve System, press release, 16 March 2008. Read twice. "The Board also approved the financing arrangement announced by JPMorgan Chase & Co. and The Bear Stearns Companies Inc." The same release created the Primary Dealer Credit Facility, "a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets", open from Monday 17 March 2008 for a minimum of six months, and states that "Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities."
[2] The two mortgage companies taken over: Federal Housing Finance Agency, statement of Director James B. Lockhart, 7 September 2008, and the agency's conservatorship history. Read twice, and the two readings disagree on the date by one day. The news conference announcing it was held on 7 September 2008 and opened "FHFA has placed Fannie Mae and Freddie Mac into conservatorship"; the agency's history page says "On September 6, 2008, with the consent of both Fannie Mae's and Freddie Mac's (the Enterprises) boards of directors, the Director of FHFA exercised statutory authority to place each Enterprise into conservatorship." The action was the 6th and the announcement was the 7th. The module prints the 7th, which is the date the BIS timeline gives and the date a reader would have learned it. On what it meant: "As conservator, FHFA has the powers of the management, boards, and shareholders of Fannie Mae and Freddie Mac", and "the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding."
[3] How much the two companies owed against what they owned, and what Lehman was holding: Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, Official Government Edition, January 2011. READ TWICE OFF THE GOVINFO COPY, identical both times: "by the end of 2007, Fannie's and Freddie's combined leverage ratio, including loans they owned and guaranteed, stood at 75 to 1", and "By the end of 2007, Lehman had amassed $111 billion in commercial and residential real estate holdings and securities, which was almost twice what it held just two years before, and more than four times its total equity." Read a third time on 2 September 2026 for the benchmark on step 2, and the report says it twice: "The investment banks had leverage ratios, by one measure, of up to 40 to 1. This means that for every $40 of assets, they held only $1 of capital", and, in the summary, "their leverage ratios were as high as 40 to 1, meaning for every $40 in assets, there was only $1 in capital to cover losses." ON EXTRACTION: the pipeline has carried since module 2 the instruction that FCIC figures must be read off a rendered image because extraction deletes the numerals. That is true of the Stanford copy. This copy is better but not clean: a plain text extraction returns every numeral as a private-use glyph in the range U+F642 to U+F64B, where U+F643 is zero and the digits run up from it, so the numerals are all there and a naive reader of the extraction sees none of them. Decode that range and the figures are exact.
[4] The dates, from a timeline written to record them rather than to win an argument: Bank for International Settlements, 79th Annual Report, June 2009, chapter II. Read twice. Against 7 September 2008: "Fannie Mae and Freddie Mac are taken into government conservatorship." Against 15 September 2008: "Lehman Brothers Holdings Inc files for Chapter 11 bankruptcy protection." The timeline's entry for 30 September 2008, on the Irish guarantee of six banks, is NOT USED: Ireland is out of scope for the 2008 series by a decision taken at stage 3.
[5] What the law let the Federal Reserve do, and the argument about Lehman that has not ended: Congressional Research Service, Federal Reserve: Emergency Lending, R44185, 27 March 2020. Read twice, identical both times. On what the law required before 2010, the borrower had to present "notes, drafts, and bills of exchange endorsed or otherwise secured to the satisfaction of the Federal Reserve Bank." On who could borrow, the original statute permitted assistance to "any individual, partnership, or corporation." And on Lehman: "Then-Chairman Bernanke later testified that the Fed declined to assist Lehman Brothers because it held inadequate collateral-although some of the Fed's other interventions under Section 13(3) featured concerns about inadequate collateral." One institution, both sides of the dispute, in one sentence, which is why the argument is carried from here rather than from the commission's majority and its dissenting views.
[6] How large Lehman Brothers was, and the day it filed: Congressional Research Service, Lehman Brothers and IndyMac: Comparing Resolution Regimes, R40928, 12 October 2009. Read twice, identical both times: "Before filing a Chapter 11 bankruptcy petition on September 15, 2008, Lehman Brothers Holdings Inc. (LBHI) was a global financial institution... It was the fourth largest U.S. investment bank with $639 billion in assets." THIS REPORT DOES NOT GIVE WHAT LEHMAN OWED, and neither does any other institution read for the 2008 work. The spine's $613 billion was retired at stage 4 on 2 September 2026 and the board carries assets instead; the whole search is recorded in the research file at link 22, under claimAmended.
[7] The loan to an insurance company, the day after Lehman: Board of Governors of the Federal Reserve System, press release, 16 September 2008. Read twice. The Board "authorized the Federal Reserve Bank of New York" to "lend up to $85 billion to the American International Group (AIG)", under "section 13(3) of the Federal Reserve Act", and "with the full support of the Treasury Department". Read again on 2 September 2026 for the benchmark on step 5: "The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries", and "The U.S. government will receive a 79.9 percent equity interest in AIG." The spine says the loan was made "by the Federal Reserve and not by the Treasury"; that is half right and the module says only the half the release supports.
[8] What the whole of it came to in the end: Congressional Research Service, Government Assistance for AIG: Summary and Cost, R42953, 13 October 2017. Read twice: "At the maximum, the Federal Reserve (Fed) and the Treasury committed approximately $182.3 billion in specific extraordinary assistance for AIG and another $15.2 billion through a more widely available lending facility." The $15.2 billion does not print: it is a different programme open to many firms, and adding it to the headline would invent a fifth figure that no institution publishes. Read twice again on 2 September 2026 for the step 5 benchmark under RULE 64: "The amount actually disbursed to assist AIG reached a maximum of $141.8 billion in April 2009." That is the committed/disbursed distinction, and two naive readers asked for it by name.
[9] The dollars lent to other central banks: Linda S. Goldberg, Craig Kennedy and Jason Miu, Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs, Federal Reserve Bank of New York Economic Policy Review, May 2011. Read twice, identical both times: "According to monthly balances published by the Federal Reserve, peak CB dollar swap balances reached $291 billion for the European Central Bank (December 2008), $122 billion for the Bank of Japan (December 2008), and $74 billion for the Bank of England (October 2008)", and "From an initial aggregate of $24 billion in December 2007, the amount authorized grew to nearly $620 billion following the bankruptcy of Lehman Brothers." The Swiss National Bank's $25.18 billion is an amount OUTSTANDING AT 31 DECEMBER 2008 rather than a peak, and is not printed beside the three peaks.
[10] What the Bank of England lent against, and on what terms: Bank of England, news release: Special Liquidity Scheme, 21 April 2008. Read twice. Banks could exchange "high quality mortgage-backed and other securities for UK Treasury Bills"; the eligible assets were "AAA-rated securities backed by UK and European residential mortgages", formed only from loans already held at the end of 2007; "Each swap will be for a period of 1 year and may be renewed for a total of up to 3 years"; and "Responsibility for losses on their loans, however, stays with the banks."
[11] How long the emergency lasted after it stopped being news: Bank of England, The Bank of England's Special Liquidity Scheme, Quarterly Bulletin 2012 Q1. Read twice: "The last of the SLS transactions expired in January 2012, at which point the SLS terminated." Read twice again on 2 September 2026, for the step 8 benchmark and the new explainer, off the article PDF as well as the page. On the size: "At its peak, the Scheme lent Treasury bills with a face value of £185 billion. To put this number in perspective, this was more than twice the size of the Bank’s balance sheet prior to the financial crisis." On why a Treasury bill is worth having: "In turn, banks could use these Treasury bills in private markets to obtain cash." And on what the scheme was for: it worked "by helping banks finance assets that had got stuck on their balance sheets following the closure of some asset-backed securities markets from 2007 onwards." NOTE FOR ANY LATER READER: this PDF is set in two columns and a plain text extraction interleaves them, so the peak sentence comes out with the box reference spliced through its middle. Both reads interleave identically and the sentence de-interleaves the same way each time.
[12] The promise, and what it was expected to do: Federal Deposit Insurance Corporation, Temporary Liquidity Guarantee Program, final rule, Federal Register, 26 November 2008. Read twice. Announced 14 October 2008. The programme guaranteed "the payment of certain newly-issued senior unsecured debt" and "certain noninterest-bearing transaction accounts", was "designed to avoid or mitigate adverse effects on economic conditions or financial stability", and was expected to work by "preserving confidence in the banking system and encouraging liquidity in order to ease lending to creditworthy businesses and consumers." NO SIZE IS PRINTED from this source or any other: what the guarantees came to is spine link 29 and belongs to module 5. The content model names four more institutions for this link and none was reached; the FDIC's own crisis-response volume returns 403 and was not retried.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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