Daily Management Review

The Largest Financial Catastrophes In The Previous 40 Years


The Largest Financial Catastrophes In The Previous 40 Years
Two of the three largest financial failures in U.S. history, as well as the acquisition of Swiss lender Credit Suisse by rival UBS Group AG in a merger facilitated by Swiss regulators, have contributed to the recent market turmoil.
Investors are concerned that if the consequences of rising interest rates damage additional lenders, there would be a negative impact on the global economy and that fears of banking contagion will persist. The following is a list of some of the most significant financial crises in the previous 40 years:
The crisis that erupted throughout the 1980s destroyed over 1,000 savings and loan (S&L) firms and cost taxpayers up to $124 billion.
The turmoil was a result of S&Ls making riskier real estate and business loans when the US eliminated interest rate ceilings from their loans and deposits, allowing them to take on more risk.
The junk bond market saw a collapse in the late 1980s as a result of many Federal Reserve interest rate increases, which came after nearly a decade of explosive development.
The financial instrument was made more well-known by Michael Milken, and many people now use it to finance leveraged buyouts. Yet when supply finally surpassed demand, the market collapsed. Milken was accused of violating the securities and reporting laws. He completed a 22-month prison sentence after paying a $200 million fine.
Mexico devalued the peso in an unexpected move in December 1994 as the country's current account deficit widened and its foreign reserves shrank. The government ultimately received $50 billion in bailout aid from the United States and external financial backing from the International Monetary Fund.
In the middle to late 1990s, there was a significant capital exodus from Asian economies, which put pressure on the regional currencies and required government support.
The crisis began in Thailand, when the Thai baht had to be devalued after months of attempts to maintain the currency's peg to the dollar depleted the country's foreign exchange reserves. The infection quickly expanded to other Asian markets, including as Indonesia, South Korea, and Malaysia.
Transnational organizations like the World Bank and the International Monetary Fund were forced to intervene with rescue packages totaling more than $100 billion for the economies.
With the Asian crisis and a later financial catastrophe in Russia in 1998, the highly leveraged U.S. hedge fund suffered losses of more than $4 billion over a short period of time. The fund suffered significant losses when Russia stopped making payments on its debt and depreciated its currency because it had a big exposure to Russian government bonds.
The Federal Reserve slashed interest rates three times in three consecutive months, and the New York Federal Reserve Bank assisted in arranging a $3.5 billion private sector bailout for LTCM.
Risky loans made to unreliable borrowers, which began to lose value after central banks hiked interest rates in the years prior to the crisis, were at the heart of the largest financial crisis since the Great Depression. Large investments in the highly leveraged mortgage bonds that had exploded in popularity in previous years had been taken by numerous corporations.
Some illustrious Wall Street behemoths, like Bear Stearns and Lehman Brothers, both of which held sizable stakes in mortgage securities, were brought down by the crisis. American International Group, a sizable insurance company, was also caught up in the scandal and required a $180 billion bailout. Washington Mutual was shut down by the American government, making it the biggest bank failure in American history. The ensuing "Great Recession" was the greatest economic downturn in the previous 70 years.
Rising debt in some of the major European economies, sparked by the 2008 financial crisis, resulted in a decline in the region's enterprises.
Greece was among the most affected due to the economic sensitivity of its main industries, shipping and tourism. It was the first economy in the euro zone to receive bailout funding. In addition to being saved from default, Portugal, Ireland, and Cyprus also experienced a rise in unemployment, notably in the nations bordering the Mediterranean Sea.