Events That Precipitated the 2008 Recession: Background information when reading Union Atlantic

Events That Precipitated the 2008 Recession

This article relates to Union Atlantic

Many of the reviews and articles about Union Atlantic (like this one) laud Adam Haslett for writing about the collapse of the financial markets before it happened. He handed his editor a first draft of the book the week that Lehman Brothers folded in 2008, one of the events that precipitated the current recession. But the book is set much earlier, in the spring, summer, and fall of 2002, and one of the book's pleasures is the way it nominates this particular moment for historical attention. In the long shadow of the 9/11 attacks, some of the events that crop up in the novel include:

• The housing bubble: When the dot com bubble burst in 2000, the Federal Reserve cut interest rates, making mortgages a cheap and safe place for newly skittish investors to park their money. Large investment banks bought mortgages from local banks, grouped them by how risky they were, and sold them as securities to investors. Investors became so hungry for mortgage-backed securities that lenders began lowering the criteria for obtaining a mortgage, thus raising home ownership and property values to insupportable heights. When property values began to correct in 2006, the value of the securities declined and the revenue stream from mortgage payments slowed down.
• Argentina: Throughout the 1990s, Western banks had been hungrily buying Argentine government bonds, because they paid a high interest rate yet seemed safe, as the International Monetary Fund helped stabilize the country's economy during its long period of privatization. In December 2001, Argentine defaulted on its sovereign debt in the amount of $93 billion, the largest debt default in history. Because the IMF was a "privileged creditor" with first dibs on any income the country raised for repayment, private investors were left empty-handed.
• Long Term Capital Management: This Greenwich-based hedge fund began trading in 1994 with over a billion dollars in capital. By September 1998, after a series of aggressive, highly leveraged trades, LTCM had an unsustainable debt to equity ratio of 250-to-1. On September 23, 1998, the heads of all the major investment banks met on the tenth floor of the Federal Reserve Bank of New York, a scene similar to one in Union Atlantic, and together they offered to buy out and restructure LTCM so that its failure would not ripple out to other markets. Eventually, the Fed itself bailed out the fund to the tune of $3.625 billion. The panic was avoided and eventually the bailers made a small profit on their ownership of the fund, which closed in 2000.
• WorldCom: Bernard Ebbers's telecommunications company began in 1983 and took over MCI Communications in 1997. After an industry downturn in 2000, WorldCom falsified its balance sheets, inflating profits by about $11 billion in order to buoy its stock price. In 2002, a secret team of WorldCom’s own employees unearthed the deception and alerted the SEC. In July 2002, WorldCom filed for bankruptcy, the largest such filing at the time. Ebbers and other executives went to jail in 2005. WorldCom has since renamed itself MCI, restructured its operations, and returned to profitability.

Union Atlantic ends just as the Iraq War begins in the spring of 2002. Adam Haslett makes a gentle but forceful connection between these economic quakes and the run-up to the war, largely through the character of Doug Fanning, a veteran of the first war with Iraq. But he does allow Charlotte Graves one biting line to connect the two: "Dominance. That's the childish pleasure you people can't get enough of."

Filed under People, Eras & Events

This "beyond the book article" relates to Union Atlantic. It originally ran in March 2010 and has been updated for the February 2011 paperback edition. Go to magazine.