Unimaginable collapses became commonplace in 2008

It was a year of record misery: the largest bankruptcy, bank failure and alleged Ponzi scheme in U.S. history; $720 billion in write-downs and losses by financial institutions; $30.1 trillion in market valuation wiped out.

The biggest loss and the hardest thing to recover, though, may be something that can't be precisely measured — confidence in the markets and the firms that rely on them.

"The wholesale funding model lost its credibility," said David Hendler, senior analyst at New York-based CreditSights.

Blow to capitalism

"That started the semi-nationalization of funding in the financial markets. It's a real chink in the armor of capitalism as supposedly the best process for allocating capital. The government is now deciding who gets access to capital."

For Paul DeRosa, a principal of Mount Lucas Management, a $1 billion hedge fund in Princeton, N.J., most unnerving was that the credit crisis revived something that, like the bubonic plague, was supposed to be a relic of the past.

"We had what was for all intents and purposes a systemic bank run for the first time in 70 years," said DeRosa, whose fund is up 25 percent in 2008. "This ended our belief that financial panics were a thing of the past. That's why this is a transcendent event."

The price tag has been transcendent, too. Global stock markets lost about half of their value in 2008, or $30.1 trillion dollars, through Dec. 30.

Trillions of value vanish

In the U.S., $7.2 trillion of shareholder value was wiped off the books, as the Standard & Poor's 500 index fell 39 percent and the Nasdaq composite index dropped 42 percent.

And if market losses weren't bad enough, as much as $50 billion went up in smoke when authorities said New York money-manager Bernard Madoff had confessed in December to what may be the biggest swindle in history — an alleged Ponzi scheme that spanned the globe, claiming victims from Alicia Koplowitz, one of Spain's richest women, to filmmaker Steven Spielberg.

Institutions that seemed as solid as their Manhattan headquarters buildings crumbled. Lehman Brothers Holdings, with assets of $639 billion, filed the largest bankruptcy in U.S. history on Sept. 15. Its creditors may have lost as much $75 billion, the firm's chief restructuring officer said.

Bear, then Merrill

Bear Stearns was taken over by JPMorgan Chase in March after a funding crisis triggered by losses from subprime-mortgage investments. Merrill Lynch, facing a crisis of its own, sold itself to Bank of America.

And the last two major investment banks, Goldman Sachs Group and Morgan Stanley, converted to bank holding companies and got capital injections from the government.

In the largest U.S. bank failure, Seattle-based Washington Mutual collapsed in September with $307 billion in assets.

There were 25 bank failures in 2008, the most in 15 years, according to the Federal Deposit Insurance Corp. The combined assets of lenders that failed last year exceeds the total of those that collapsed in the preceding six years.

New York-based Citigroup, which lost 77 percent of its market value through Dec. 30, needed $20 billion in U.S. bailout funds in November on top of an earlier $25 billion infusion of capital. The government also guaranteed $306 billion of the bank's troubled assets.

The wave of write-downs and losses that swamped financial institutions around the world reached $720 billion in 2008. It also eroded employment: 221,360 job cuts in the financial-services industry were announced.

Wall Street bonuses became so rich in recent years that $1 million was referred to as "a buck."

In 2008, CEOs including Lloyd Blankfein, of Goldman Sachs, and John Mack, of Morgan Stanley, had said they will get no bonuses at all.

The Amex Securities Brokers/Dealers Index hit a high of 267.69 on June 1, 2007; as of Dec. 30, it stood at 74.26.

The U.S. government was forced to rescue the world's largest insurance company, American International Group, with a $152.5 billion package of investments, loans and capital infusions.

It had to start purchasing corporate commercial paper to give companies the capital they needed to meet payrolls and conduct routine business.

Overall, the federal government has committed $8.5 trillion in trying to jump-start a shrinking economy. General Motors and Chrysler will get $13.4 billion in federal loans to stay afloat until President-elect Obama's administration can devise a rescue plan of its own.

Frozen credit ripples

The paralysis of credit markets sent ripples through many of the businesses that had flooded Wall Street with profits over the past decade.

U.S. corporations raised $4.54 trillion issuing securities in 2008, down from $5.14 trillion in 2007. Global merger activity fell to $2.5 trillion in deals announced from a record $4.1 trillion the previous year.

Hedge funds lost 18 percent of their value through November, the worst year since record-keeping began in 1990, according to Chicago-based Hedge Fund Research. Morgan Stanley estimated that, by year end, at least 620 hedge funds will have closed.

At bottom, the debacle amounted to a loss of faith, especially for individual investors. They pulled $215.7 billion from stock mutual funds in the first 11 months of the year, according to Investment Company Institute, a Washington, D.C.-based association.

That compares with a $91 billion inflow of funds for the same period of 2007.

As a result of those withdrawals and market losses, the total net assets in all types of mutual funds fell by $2.67 trillion in the first 11 months of 2008, the institute reported.

While the fear may pass, it will leave permanent changes. Few believe Wall Street will emerge as anything like the freewheeling industry it was over the past few decades.

"I see this as a Darwinian event," said Mount Lucas Management's DeRosa.

"You find out which specimens of the species are genetically fit. I'm reasonably sure that things in 2009 will get better, but they'll get materially worse before they start to look up."