U.S. housing finance stress deepened when the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship. This government control step aimed to stabilize the two mortgage giants so they could keep supporting mortgage lending. The move signaled that the crisis had spread from housing markets into core financial institutions.
Lehman Brothers filed for bankruptcy, a failure that quickly shook confidence in banks and investors worldwide. Because Lehman was a major investment bank, its collapse disrupted short-term funding and trading relationships across the financial system. Equity markets began reacting to the possibility that other large firms could also fail.
The Federal Reserve authorized the New York Fed to lend up to $85 billion to insurer AIG, with Treasury support, to prevent a disorderly failure. AIG’s problems were tied to its large role in financial contracts, so its collapse threatened broader market functioning. The rescue reinforced the sense that the crisis was systemic, not limited to banks.
U.S. regulators temporarily prohibited short selling in hundreds of financial companies, aiming to reduce panic-driven selling pressure. The SEC described the measure as an emergency step to protect market integrity and investor confidence. It was one of several rapid rule changes during a period of extreme volatility.
The Federal Reserve announced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). It provided loans so banks could buy high-quality asset-backed commercial paper from money market funds, helping funds meet withdrawals. This targeted a key stress point, because money market funds and commercial paper are central to short-term business financing.
Regulators seized Washington Mutual’s bank and placed it into FDIC receivership, and JPMorgan Chase acquired its banking operations. The action was designed to protect depositors and limit disruption, but it highlighted how quickly confidence could collapse at large institutions. The failure added to market fears during the September selloff.
The U.S. House of Representatives voted down the initial bailout bill, intensifying worries about the financial system’s stability. U.S. stocks fell sharply as investors questioned whether policymakers could act quickly enough to prevent a credit freeze. This session became a symbol of how politics and market confidence interacted during the crisis.
The U.S. Treasury opened a temporary program to guarantee eligible money market mutual funds’ share prices for investors’ balances held as of September 19, 2008. This was meant to reduce runs, where many investors demand cash at the same time. Stabilizing money market funds mattered because they are widely used by households, businesses, and institutions for cash management.
After revisions, Congress passed and the President signed the Emergency Economic Stabilization Act, creating the Troubled Asset Relief Program (TARP). The law provided tools intended to restore liquidity and stabilize financial institutions. It was a major turning point because it expanded the federal government’s capacity to intervene directly.
The Federal Reserve established the Commercial Paper Funding Facility (CPFF) to backstop the commercial paper market. Commercial paper is short-term borrowing that many large companies use to pay daily bills like payroll and inventory. The CPFF aimed to reduce the risk that firms would be unable to roll over maturing debt, easing pressure on credit markets.
G7 finance ministers and central bank governors agreed on urgent steps to stabilize systemically important institutions, unfreeze credit markets, and strengthen deposit insurance confidence. The statement reflected how the crisis had become globally coordinated, not just national. On the same day, trading conditions were highly turbulent in major equity markets, amplifying pressure for coordinated policy responses.
After extending earlier emergency restrictions, the SEC allowed the temporary short-selling prohibition for financial stocks to expire. The end of the ban did not by itself resolve market stress, but it marked a shift from emergency trading limits toward longer-term policy tools. By mid-October, attention was increasingly on recapitalizing banks and restoring credit flows.
Global equity market meltdown and October 2008 trading turbulence (September–October 2008)