Most Americans do not realize just how close the U.S. banking system came to collapsing in the fourth quarter of 2008, Kevin Blakely, chief risk officer at Huntington Bancshares Incorporated, said Monday during a speech at the National Collections & Credit Risk Conference in Miami.
Blakely recapped the financial events leading up to the collapse of Bear Stearns in early 2008 and the subsequent failure of Lehman Brothers in October of that year.
He credited the federal government for intervening just in time, calling the government the "unsung hero" in saving the banking system and possibly the entire U.S. economy.
Several measures taken in the aftermath of the high-profile institutional failures worked, he added.
First, the Treasury Department created the Troubled Asset Relief Program (TARP) to help return liquidity to the financial markets. Today, many of the banks are repaying those funds.
Second, the Federal Reserve cut interest rates low enough to convince banks to start lending again. The Fed also began buying "hundreds of billions" of dollars worth of mortgage-backed securities. "By doing so, they created a demand for them that kept the housing market alive," Blakely said.
Next month, the Fed is scheduled to stop the program to purchase mortgage-backed paper but Blakely believes that to prevent any shock to the market it likely will choose to taper down the program rather than suddenly stop it.
Finally, the Federal Deposit Insurance Corp. helped the banking system recover by hiking insurance coverage for consumer deposits and choosing to insure commercial deposits - moves that importantly helped prevent more deposits from flowing away from banks.
"Combined, the extraordinary efforts really saved our banking system and thus saved the U.S. economy," Blakely said. It was a frightening time, but most Americans had no idea just how frightening, he added.
Today, some 18 months after Lehman Brothers fell, Blakely told the audience that the economy seems to be stabilizing and the crisis, of course, is long over. Indeed, in Q1 2010, the economy appears headed for positive GDP growth for a second straight quarter.
