A year ago today, financial meltdown began

INTERACTIVE: Financial Meltdown

A year ago, the jobless rate topped 6 percent for the first time in five years, but the peril posed by Tropical Storm Hanna received more attention.

We had little clue of the other storm that was approaching, coming not from nearby waters but from Wall Street.

A year ago today, the U.S. government took over faltering mortgage giants Fannie Mae and Freddie Mac because they were deemed too big to fail.

Thus began the meltdown -- the worst financial crisis since the Great Depression.

"Of course, now we're finding out how close we were to the abyss," Kent Engelke, chief economic strategist and managing director at Capitol Securities Management Inc., recalled last week

Between Labor Day and November, a series of financial crises -- bank failures, stock sell-offs, corporate takeovers and mergers, and acts of unprecedented government intervention into financial markets -- reduced once-stable companies to mere shells, wiped away billions from investment portfolios and contributed to massive layoffs.

As the turmoil of September continued through the fall, reporters at the Richmond Times-Dispatch turned to local financial analysts and experts for answers and insight. Some of their observations were fearful, others hopeful. Most were guarded.

Today, our expert sources take a look back at what they said then, reflect on what has happened in the interim and consider what the future may bring.

. . .

Sept. 7, 2008: The Bush administration says the takeover of Fannie Mae and Freddie Mac is necessary to avert the collapse of mortgage markets and more turmoil in the housing market, brought on by the subprime mortgage crisis.

Our expert then: "The problem can't be fixed overnight," said J. Alfred Broaddus Jr., former president of the Federal Reserve Bank of Richmond. "It will be a matter of years."

Broaddus now: Stepping in to the rescue was a good move. "It put a floor on how far down the market could go."

Discussions continue today about how Fannie Mae and Freddie Mac may look in the future. Their purpose, as publicly owned, government-sponsored corporations, was to help provide a robust mortgage securities market to foster housing in the United States, Broaddus said.

The problem was the two entities were gargantuan, guaranteeing or owning $5 trillion in home loans. A failure would send damaging ripples throughout the economy. Broaddus said smaller institutions with focused missions that provide government guarantees may be the answer, but it is one that will take time.

Our expert then: "In general, I am not supportive of government intervention," said Capitol Securities Management's Engelke. "But this was the right and the only thing to do. You and I will pay for it, but if we pay for it now, it will be a lot cheaper than if the companies had been allowed to go under."

Engelke now: The government acted correctly. "I believe very few really grasped the enormity of the situation. Who would have thought that Fannie Mae, Freddie Mac, AIG, Wachovia, Lehman Brothers would fail. It was an incredible time. Just thinking about it raises my stress."

. . .

Sept. 15, 2008: Investment house Lehman Brothers Holdings Inc. files for Chapter 11 bankruptcy protection. At the time, it is the largest bankruptcy case ever filed in the United States.

That same day, Bank of America announces plans to buy another investment bank, Merrill Lynch & Co., in a deal brokered by the federal government.

The Dow Jones industrial average drops more than 500 points.

Our expert then: "Some think this will end very badly, like in the 1930s," Broaddus said. "But we know a lot more now about monetary policy and dealing with financial crises than we did in the'30s. We should be able to use this knowledge to get through this with minimum lasting damage to the overall economy."

Broaddus now: "I think that's what happened," he said. "My feeling was that we did learn a great deal in the Great Depression, mainly how important it was for the Fed to step in and provide liquidity.

Our expert then: "When you have the largest and most respected firms in the U.S. and in the world being reorganized or bought out, that is a huge sea change in the financial-services industry," said S. Buford Scott, chairman of Scott & Stringfellow Inc. in Richmond.

Scott now: New oversight and a change to rules should help ensure companies are more accurately valued, which in the past led to some of the failures, Scott said. Federal authorities have also taken steps to limit how hedge-fund actions can push prices down. The result: Investors will make decisions based on more accurate representations of value.

"When the economy comes back, it will be based a bit more on the actual economy," Scott said.

Our expert then: Dean Croushore, now chairman of the economics department at University of Richmond's Robins School of Business, was asked what the turmoil in the financial sector would mean for the economy.

"There will be some negative fallout from the demise of investment firms, but the impact on the economy would be far worse if a large commercial bank failed," Croushore said.

Weeks later, Washington Mutual Bank would close and the federal government would be brokering the sale of Wachovia Corp.

Croushore now: "We hadn't seen much weakness in commercial banks at the time but we didn't know what we would find in the coming weeks," he said.

Risk has been a recurring theme during the recession. Individuals may have gambled on mortgages more than they could afford, but banks also took big risks. Securitizing mortgages -- lumping them together and selling them off -- seemed like a way to diminish risk. But it also made assessing risk difficult. The inability to determine how much risk a bank was exposed to made investors nervous, which in turn, led to a drop in value of many banks, both commercial and investment.

"We found it was really hard to unwind the securities and determine the risk," Croushore said. "I had no idea at that time how pervasive that was, how it would spread throughout the system."

. . .

Sept. 29, 2008

During a rare weekend session, congressional leaders cobble together a $700 billion bailout package they are optimistic will pass both houses. The plan to buy toxic assets, however, is voted down the next day.

As restless traders watch the live vote that Monday, the Dow Jones plunges, closing 777.68 points down. It is the biggest single-day decline ever recorded.

By the end of the week, Congress passes the Troubled Asset Relief Program -- TARP -- and a new acronym will become a household word.

Our expert then: "In general, this is a complete rewrite of American capitalism," Engelke said. "Drastic times require drastic measures. We have to do this . . . and worry about the consequences later."

Engelke now: "We're experimenting right now with deficits we have never seen before," he said. "This is a great financial experiment."

Creativity may be stifled out of fear that it could lead to another crisis. New ideas could be questioned more and challenged. "I think the unintended consequences is going to be a muddle-through economy," Engelke said. "I think government is going to impede some growth."

Engelke also believes the public will rebel against the massive programs implemented in the wake of the financial crisis and that President Barack Obama won't be re-elected as a result.

. . .

November 2008

Several local companies announce major cutbacks, affecting hundreds of jobs.

Consumer-electronics retailer Circuit City Stores Inc. declares Chapter 11 bankruptcy Nov. 10.

Title insurer LandAmerica Financial Group Inc. files for bankruptcy two weeks later.

Our expert then: "This time unfortunately, Richmond is likely to be hit harder than the state because of its cluster of finance and insurance firms, the location of the state capital and firms with corporate headquarters that were struggling even before the recession," Christine Chmura, president and chief economist at Chmura Economics & Analytics in Richmond, said in a column published in the Richmond Times-Dispatch.

Chmura now: Employment in the Richmond region, peak to trough, dropped 4.3 percent during the recession. Peak to trough in Virginia, employment dropped 3.3 percent, Chmura said.

"I would expect from the loss of these companies that Richmond will be slower to rebound than the rest of the country," Chmura said.

One bright spot: Expansion at Fort Lee and the Rolls Royce plant in the Tri-Cities area should add to employment levels in the larger Richmond metropolitan area, she said.

. . .

Dec. 1, 2008

The National Bureau of Economic Research declares a recession, saying it began in December 2007.

The Dow Jones drops nearly 680 points.

Our expert then: "We will know that the recession is over when we start to see manufacturing activity picking up, and consumers starting to spend again on large-dollar items such as cars and appliances and houses," Chmura said.

Chmura predicted the recession would come to an end during the fourth quarter of this year.

Chmura now: The economist has revised her estimate and now believes the recession will come to an end during the third quarter of this year.

Factory orders are increasing, consumer spending has picked up and confidence is rising. Much of the recovery is due in part to the stimulus of the American Recovery and Reinvestment Act.

"It looks like the Cash for Clunkers program helped bring the recession to a quicker end," Chmura said.

Contact Emily C. Dooley at (804) 649-6016 or .