Diary of a Crisis: Two Years and Counting

CHICAGO, August 11, 2009 — "August marks the two-year anniversary of the 'official' start of the financial market crisis. To commemorate the occasion, I wanted to take a look back at those early days of the crisis, the sequence of events as they unfolded, and how they set the stage for the economic storm we have been living through for the past two years. Only by memorializing each step can we avoid making the same mistakes in the future," says Diane Swonk, chief economist of Mesirow Financial, in her August edition of Themes on the Economy.

Swonk's August newsletter – part of a bigger research project that she is currently undertaking – is just the tip of the iceberg, covering August 2007 through January 2008, a shaky period when a lack of consensus by members of the Fed about the depth of the crisis did more to create confusion than to clarify its resolve to stabilize financial markets when they began to tumble:

August 1, 2007: BNP Paribas, one of Europe's largest banks released better-than-expected earnings...

August 9, 2007: Bloomberg reported that BNP Paribas halted withdrawals from three funds because they could no longer "fairly" value their holdings...

"This news, coupled with the fact that the CEO of the bank seemed oblivious to the situation just eight days prior, sent European markets into a tail spin. Trust between banks was shattered, and the overnight loans that banks provide to one another all but disappeared," notes Swonk. "In response, the European Central Bank (ECB) was forced to intervene to stabilize markets and provide liquidity."

August 10, 2007: The Fed, which was caught off guard by its counterpart in Europe, released a short statement assuring financial markets that it too would provide liquidity.

October 26, 2007: Countrywide Financial, the nation's leading mortgage lender, reported $1.2 billion (twice analysts' estimates) in losses in the third-quarter, and the first loss in 25 years.

October 31, 2007: The Fed took a complete 180-degree turn, and eased again at its regularly scheduled meeting, which ended on Halloween.

"In November, economic conditions continued to deteriorate and forecasts for the fourth quarter were revised down. The overall consensus among most economists, however, was that the problems we were facing were transitory, and still more of an issue for Wall Street than Main Street," says Swonk.

December 11, 2007: The Fed lowered its target fed funds rate by 25 basis points (bps) from 4.5% to 4.25% at its regularly scheduled meeting.

"The holidays were bloody and retailers were hurting. The Administration jumped into the game, and Treasury Secretary Hank Paulson started using his skills of persuasion (intimidation) to get a stimulus package passed; however, much of the damage had already been done," says Swonk.

January 17, 2008: Fed Chairman Ben Bernanke called four meetings with his staff, went to Capitol Hill for a talk with House Budget Committee Chairman John Pratt, and ended the day on a five-minute phone call with Treasury Secretary Paulson.
January 21, 2008: Bernanke convened with his colleagues by video conference to encourage them to okay a 75 bps inter-meeting cut in the fed funds target. He and Vice Chairman Donald Kohn, who was Greenspan's confidant, argued that the Fed was behind the curve on cutting rates.
January 30, 2008: The Fed voted to reduce the fed funds target by another 50 bps to 3% at its regularly scheduled meeting. The discount rate was cut to 3.5%.

"Was the Fed coming to an end in its easing cycle, or did it expect to ease further? Any of the psychological benefits that the Fed had gained by moving aggressively were lost by showing internal dissent (it slashed the fed funds target by 225 bps in just four months). In a war, the troops (investors, in this analogy) look for their leadership (the Fed) to be united - not divided - in their strategy," concludes Swonk.

The August issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent employee-owned firm with $30 billion in assets under management and 1,100 employees in offices across the country. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial has consistently met the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.

The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc., © 2009, Mesirow Financial Holdings, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s).

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