For 2008, one big story with countless angles

Allison Linn Senior writer • Profile • E-mail

Every year we reporters and editors gather in our smokeless newsrooms to debate the top stories of the year and come up with endless "top 10" lists.

This year, on the business desk at least, there was no need for debate because there was really only one story: a financial crisis that crept in with the new year and then grew into a monster, dominating the presidential campaign, cocktail parties, newspaper front pages and this Web site.

The meltdown, which is rooted in the runaway loan practices of the housing boom years, has spread around the world and drawn comparisons with the Great Depression with its severe market downturn and accompanying financial panic. Millions are likely to lose their homes, jobs or both before it is all over, and retirement savings have been decimated for generations of investors. Even those who have not been directly affected can't help but be spooked, casting a cloud of uncertainty over the nation's critical retailing sector.

And, thanks to trillions — trillions! — of dollars of federal money committed to dig us out of the hole, we will be paying for it for years to come.

Here is a look at the 10 top elements of the big story.

1) Credit crunch: In the freewheeling days that led to the current crisis, lenders grew so lenient that borrowers were able to qualify for home loans without providing basic information, such as proof of employment. Credit rating agencies failed to alert investors to the risks of  bought securities backed by those mortgages.

Things began to unravel as more people who had taken risky loans found they could not keep up with payments, and went into foreclosure. Home prices plummeted, and the complex securities backed by mortgages began to implode.

As some financial institutions buckled and others collapsed, there was an abrupt and damaging change of course. Many businesses suddenly lost access to the routine credit used for everyday expenses like payroll, while consumers found it harder to get loans to buy cars or homes. This credit squeeze played a major role in bringing the economy to a standstill in the final quarter of the year.

2) Wall Street’s dramatically altered landscape: The first serious sign that the housing meltdown would ripple through the financial industry came in March, when Bear Sterns made the surprise announcement that it needed funding from rival JPMorgan Chase, backed by the Federal Reserve, in order to keep operating.

That turned out to be just the beginning.

Within days, JPMorgan had announced a plan to buy Bear Stearns outright at a shocking price of just $2 a share in a deal engineered by the Fed. (The price was later boosted to $10 a share.) Two months later, government regulators seized IndyMac in one of the nation’s biggest bank failures.

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In September, things really unraveled in a momentous few days as the government took control of mortgage giants Fannie Mae and Freddie Mac, Merrill Lynch was acquired by Bank of America and — in a key turning point in the crisis — Lehman Bros. was allowed to collapse after Treasury Secretary Henry Paulson declined to intervene. Lehman's bankruptcy filing, the largest in U.S. history, set off one of many waves of panic in financial markets.

The list goes on: The Fed rescued insurance giant American International Group Inc., taking an 80 percent stake in the company and eventually committing $150 billion. In the nation's biggest bank failure, Washington Mutual was seized by the Federal Deposit Insurance Corp., which engineered a sale of its assets to JPMorgan Chase. In October, struggling Wachovia was acquired by Wells Fargo.

As one analyst put it, a decade's worth of consolidation took place in just a few weeks,  annihilating yesterday's stalwarts and leaving a few megabanks with unprecedented dominance. The mayhem already has cost tens of thousands of job losses.

3) $700 billion bailout: Desperate to stop the panic and avoid something even more disastrous, Paulson went to Congress in mid-September and asked for an astounding $700 billion — an amount equal to nearly a quarter of the government's annual budget — to rescue the financial sector.

The plan, which was little more than a memo at first, came under fire from hard-hit Americans demanding to know why taxpayers should be saddled with the bill for bailout out mismanaged companies.

In one of the most dramatic moments of the crisis, the House of Representatives rejected the bailout package, sending the stock market plummeting and the entire effort into a tailspin. In the end, Congress approved the package after adding billions of dollars in additional tax breaks. President George W. Bush quickly signed it into law. Paulson later made a stunning about-face, canceling the debt buyback plan and investing much of it directly into banks instead.

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