The economics of money, banking, and financial markets

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C H A P T E R   1 2   Financial Crises 

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hard-to-value assets. In July, Fannie Mae and Freddie Mac, the two privately owned, 

government-sponsored enterprises that together insured over $5 trillion of mortgages 

or mortgage-backed assets, were propped up by the U.S. Treasury and the Federal 

Reserve after suffering substantial losses from their holdings of subprime securities. In 

early September 2008, Fannie Mae and Freddy Mac were put into conservatorship (in 

effect, run by the government).

On Monday, September 15, 2008, after suffering losses in the subprime market, 

Lehman Brothers, the fourth-largest investment bank by asset size with over $600 bil-

lion in assets and 25,000 employees, filed for bankruptcy, making it the largest bank-

ruptcy filing in U.S. history. The day before, Merrill Lynch, the third-largest investment 

bank, which had also suffered large losses on its holdings of subprime securities, 

announced its sale to Bank of America for a price 60% below its value a year earlier. On