Black Monday (2011)
Encyclopedia
In finance
and investing, Black Monday 2011 refers to August 8, 2011, when US and global stock markets catastrophically crashed
following the Friday night credit rating
downgrade by Standard and Poor's of the United States
sovereign debt from AAA, or "risk free", to AA+. It was the first time in history the United States was downgraded. Moody's
issued a report during morning trading which said their AAA rating of U.S. credit was in jeopardy, this after issuing a negative outlook in the previous week.
By market close, the Dow Jones Industrial Average
lost 634.76 points (-5.55%) to close at 10,809.85, making it the 6th largest drop of the index in history. Black Monday 2011 followed just one trading day behind the 10th largest drop of the Dow Jones Index, a 512.76 (-4.31%) drop on August 4, 2011.
attempted to calm the markets during trading in a speech from the White House
, but the DOW lost 200 more points within 20 minutes after he concluded.
Composite Index fall 174.72 points (-6.90%) closing at 2,357.69, the S&P 500
Index shed 79.92 points (-6.66%), the New York Stock Exchange
lost ] 523.02 points (-7.05%), finishing the day at 6,896.05, and the Dow Jones Industrial Average
lost 634.76 points (-5.55%) to close at 10,809.85. Both the Dow Jones Industrial Average and the NASDAQ Composite Index ended the day at their respective session lows.
debt ceiling crisis was a financial crisis
that started as a political and economic debate over increasing the statutory limit of US federal government borrowing. The limit of the indebtedness of the government of the United States is also known as the debt ceiling. In the run up to the crisis, the United States had approached, and actually passed, this limit.
Since the United States Department of the Treasury
has no authority to issue or incur debt beyond the debt ceiling set by the United States Congress
, failure to reach an agreement between the necessary members of the government to raise the debt ceiling meant that certain debts would not be paid
, and this would potentially affect the government's ability to borrow quickly or at low cost, due to a perception of increased risk in loaning money to the US government. If the debt ceiling were not raised by August 2, 2011, either government spending would have to be decreased, or debt would have to be paid later than promised, also known as a default.
The debate was contentious, with nearly all Republican
legislators opposing any increase in taxes and the large majority of Democratic
legislators viewing tax increases as necessary along with spending cuts. Supporters of the Tea Party
movement pushed Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a completed balanced-budget constitutional amendment
.
The immediate crisis of 2011 ended when a complex deal imposing limits on both debt and government spending was reached on July 31. After the legislation was passed by both the House and Senate, President Barack Obama
signed the Budget Control Act of 2011
into law on August 2, the day of the deadline. However, because of the political upheaval caused and the perception by powerful credit ratings agencies that the United States government could not effectively manage its large debt positions, the largely anticipated positive effects that the debt deal would have on the markets never came to fruition. Instead, following the downgrading
of US sovereign debt, as well as the Fannie Mae and Freddie Mac government-backed lenders by Standard and Poor's from a AAA to a AA+ rating, the global stock markets experienced a prolonged period of heightened selling activity ultimately resulting in the crash of Black Monday 2011.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
and investing, Black Monday 2011 refers to August 8, 2011, when US and global stock markets catastrophically crashed
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...
following the Friday night credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
downgrade by Standard and Poor's of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
sovereign debt from AAA, or "risk free", to AA+. It was the first time in history the United States was downgraded. Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
issued a report during morning trading which said their AAA rating of U.S. credit was in jeopardy, this after issuing a negative outlook in the previous week.
By market close, the Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
lost 634.76 points (-5.55%) to close at 10,809.85, making it the 6th largest drop of the index in history. Black Monday 2011 followed just one trading day behind the 10th largest drop of the Dow Jones Index, a 512.76 (-4.31%) drop on August 4, 2011.
U.S. Presidential reaction
U.S. President Barack ObamaBarack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
attempted to calm the markets during trading in a speech from the White House
White House
The White House is the official residence and principal workplace of the president of the United States. Located at 1600 Pennsylvania Avenue NW in Washington, D.C., the house was designed by Irish-born James Hoban, and built between 1792 and 1800 of white-painted Aquia sandstone in the Neoclassical...
, but the DOW lost 200 more points within 20 minutes after he concluded.
U.S. market aftermath
The NASDAQNASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
Composite Index fall 174.72 points (-6.90%) closing at 2,357.69, the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
Index shed 79.92 points (-6.66%), the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
lost ] 523.02 points (-7.05%), finishing the day at 6,896.05, and the Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
lost 634.76 points (-5.55%) to close at 10,809.85. Both the Dow Jones Industrial Average and the NASDAQ Composite Index ended the day at their respective session lows.
Relationship to United States debt ceiling crisis
The United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
debt ceiling crisis was a financial crisis
Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
that started as a political and economic debate over increasing the statutory limit of US federal government borrowing. The limit of the indebtedness of the government of the United States is also known as the debt ceiling. In the run up to the crisis, the United States had approached, and actually passed, this limit.
Since the United States Department of the Treasury
United States Department of the Treasury
The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
has no authority to issue or incur debt beyond the debt ceiling set by the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
, failure to reach an agreement between the necessary members of the government to raise the debt ceiling meant that certain debts would not be paid
Default
Default may refer to:*Default , the failure to do something required by law**Default judgment*Default , failure to satisfy the terms of a loan obligation or to pay back a loan*Default , a preset setting or value...
, and this would potentially affect the government's ability to borrow quickly or at low cost, due to a perception of increased risk in loaning money to the US government. If the debt ceiling were not raised by August 2, 2011, either government spending would have to be decreased, or debt would have to be paid later than promised, also known as a default.
The debate was contentious, with nearly all Republican
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
legislators opposing any increase in taxes and the large majority of Democratic
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
legislators viewing tax increases as necessary along with spending cuts. Supporters of the Tea Party
Tea party
A tea party is a formal, ritualized gathering for afternoon tea.Formal tea parties are often characterized by the use of prestige utensils, such as bone china or silver. The table is made to look its prettiest, with cloth napkins and matching cups and plates. In addition to tea, larger parties may...
movement pushed Republicans to reject any agreement that failed to incorporate large and immediate spending cuts or a completed balanced-budget constitutional amendment
Constitutional amendment
A constitutional amendment is a formal change to the text of the written constitution of a nation or state.Most constitutions require that amendments cannot be enacted unless they have passed a special procedure that is more stringent than that required of ordinary legislation...
.
The immediate crisis of 2011 ended when a complex deal imposing limits on both debt and government spending was reached on July 31. After the legislation was passed by both the House and Senate, President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
signed the Budget Control Act of 2011
Budget Control Act of 2011
The Budget Control Act of 2011 was passed by the 112th United States Congress signed into law by President Barack Obama. It brought conclusion to the 2011 United States debt ceiling crisis, which had threatened to lead the United States into sovereign default on or about August 3, 2011.The law...
into law on August 2, the day of the deadline. However, because of the political upheaval caused and the perception by powerful credit ratings agencies that the United States government could not effectively manage its large debt positions, the largely anticipated positive effects that the debt deal would have on the markets never came to fruition. Instead, following the downgrading
Downgrade
In computing, downgrading refers to reverting software back to an older version; downgrade is the opposite of upgrade. Often, complex programs may need to be downgraded to remove unused or bugged features, and to increase speed and/or ease of use...
of US sovereign debt, as well as the Fannie Mae and Freddie Mac government-backed lenders by Standard and Poor's from a AAA to a AA+ rating, the global stock markets experienced a prolonged period of heightened selling activity ultimately resulting in the crash of Black Monday 2011.
See also
- Black Monday (1987)Black Monday (1987)In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...
- Wall Street Crash of 1929Wall Street Crash of 1929The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...
- 2010 Flash Crash
- List of largest daily changes in the Dow Jones Industrial Average