Islamic Finance and the New Financial System: An Ethical Approach to Preventing Future Financial Crises

Chapter 3The Global Financial Crisis of 2008

Back in my office in Chicago, the week of September 15, 2008, was a week filled with headlines and disbelief. Our business froze overnight, and all private equity transactions in the market were put in a permanent holding pattern until someone could figure out what was going on. All we could do at that point was watch the news and see how the rest of the events played out.

Not long after we heard that Lehman Brothers had filed for bankruptcy news surfaced that AIG, one of the oldest and largest insurance companies in the United States, was on the verge of collapse. Markets around the world were in turmoil. U.S. Treasury Secretary Henry Paulson was urged to submit a plan to rescue financial markets to avoid an all-out meltdown. On September 20, Paulson submitted a three-page proposal calling for the Treasury to purchase up to $700 billion in toxic mortgages and calm markets. The plan was rejected by the U.S. House of Representatives, which called it too short on details and told the Treasury to come up with a real plan to save the financial markets.¹ Fed President Ben Bernanke stressed to Congress the urgency of rescuing financial institutions, saying that “if we don't do this, we may not have an economy on Monday.”²

Paulson went back to draw up a more detailed plan, while at the same time U.S. lawmakers started working on the Emergency Economic Stabilization Act, a comprehensive bill to bail out financial institutions and, it was ...