The Credit Crisis Turns One

[Crewleader]

It was a year ago August that the real estate slump turned into a global economic disaster—and it's still growing

by Prashant Gopal

Happy birthday, credit crisis. It was a year ago August that the world began to suspect the economy was heading into something worse than a slump. Now as another August heaves into view, the credit crisis is a year bigger and—like many 1-year-olds—indiscriminate about where it makes its messes. The real concern is how much bigger it will get.

The crisis has transformed the housing market from weak to downright disastrous. Home prices are tumbling, foreclosures are spiking, and the bottom of the market seems more distant than ever. Gone are the loose lending tandards that helped millions of people buy houses they couldn't afford otherwise. Today, securing a loan can be tough, even for buyers with decent credit.

The world was not braced for the impact the real estate slump would have on the financial industry. It was on Aug. 1, 2007, that two Bear Stearns hedge funds heavily invested in mortgage-backed bonds filed for bankruptcy, and another had its assets frozen following mortgage-related losses. Within a week, Luxembourg's Sal. Oppenheim, one of Europe's largest private banks, announced it had temporarily closed a €750 million asset-backed securities fund it managed for Austrian investment foundation Hypo KAG. And, on Aug. 9, BNP Paribas (BNPP.PA), France's biggest bank, followed suit by freezing $2.2 billion worth of funds exposed to the subprime mortgage market. On that same day Dutch merchant bank NIBC canceled a flotation plan after revealing a $188.6 million loss from U.S. asset-backed securities. It was becoming apparent that many of the mortgage-backed securities that had been used to pump billions of dollars into the global economy were considerably overvalued. Lenders around the world were getting very nervous, very fast. They had reason to be.

http://www.businessweek.com/lifestyle/content/jul2008/bw20080731_850024.htm