2008: Year of the Crunch - Part Two: Black September
Wednesday, 17 December 2008 01:49
2008 will be remembered for economic turmoil and the crash that knocked Wall Street to its knees.
While the dominoes had been falling for the last two years - as localised US defaults in the subprime market, knocked the mortgage-backed securities into the dirt, banks started to wonder how much was lost, lending from Wall Street to the High Street dried up, and giants tumbled.
As facts arose, it became clear rating agencies were putting AAA ratings on products they did not understand, head bankers themselves did not understand investments, and as losses rose, debts were called in as UK high street stalwarts wobbled along with Wall Street icons.
Black September: Week 1
On September 15th 2008 Lehman Brothers - the investment bank with roots back to the 1850s - filed for bankruptcy.
The US government took the decision not to aid Lehmans and a whole system that had been teetering on the brink for months collapsed. In London, as employees left work with boxes packed with possessions, the administrators admitted it was "amazing a business of this size can fail. It highlights the importance of market confidence".
"We saw it with Northern Rock last year and once confidence is gone there is no going back," Tony Lomas from PricewaterhouseCoppers (PWC) stated.
Confidence fled the entire financial system.
If Lehmans could go, the fear was, anyone could follow.
And they did follow, as share prices for any firm involved in finance fell through the floor.
Bank of America stepped in to save Merrill Lynch with a $50 billion takeover on the same day.
Two days later AIG was rescued by the US government - buying 79.9 per cent of the firm - as the failure of the insurer, burned by derivatives, would have been a major threat to the US economy.
The AIG board put the failure down to "serious liquidity issues", while the Federal Reserve said a "disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance".
The same day, HBOS and Lloyds TSB admitted they were in merger talks - as HBOS looked overstretched. Rumours rose that Gordon Brown had stepped in to twist the arms of Lloyds TSB to save the UK's largest mortgage lender.
Washington tried to stop the collapses, with US Treasury Secretary Henry Paulson putting together $700 billion plan to save the banks by buying up "toxic assets".
As share prices of banks fell, the blame was laid on short-selling hedge funds and they were banned from betting on the prices of financial stock falling.
Crisis continues
The next week more trauma came - as tales of the collapse of capitalism arose.
Goldman Sachs and Morgan Stanley, Wall Street's last two independent investment banks, changed status to bank holding companies to take deposits and boost liquidity, while Washington Mutual became the biggest corporate failure in US history.
The Paulson plan had boosted confidence, but traders on Wall Street watched Washington anxiously and when the House of Representatives voted the plan down, share prices fell further.
In the UK, Bradford & Bingley announced it was leaving the mortgage market, cutting jobs and focusing on saving. With cash behind it from a rights issue, which had faced numerous hurdles as US investors backed out, the B&B chief later claimed at the time the bank had one of the highest capital ratios of any lender in Europe.
While Northern Rock a year before was wrecked by queues outside branches, B&B saw £200 million withdrawn online on Saturday September 27th. The next day it was told it could not go on and the buy-to-let lender was nationalised on the Monday.
In Europe, the governments of Belgium, the Netherlands and Luxembourg agreed to bail out troubled bank Fortis with an ?11.2 billion investment.
Brown saves the world
The crisis continued into October.
On October 6th the FTSE 100 closes down 7.85 per cent as world faced 'Black Monday II' and share prices globally nose dived further.
The $700bn bailout bill was finally passed by the US House of representatives after numerous tweaks and checks put in place.
In London the crisis was deemed to be so bad, Gordon Brown was forced to recall Peter Mandelson from Europe for an 'economic war council'.
Then Iceland happened. The nation found itself under increasing pressure as its currency fell through the floor as highly leveraged investment firms saw debts recalled.
Icelandic banks failed, Darling used anti-terror powers to seize Icelandic assets, and the government had to guarantee savers at Icesave as it transpired the Nordic nation didn't have enough cash.
October 8th saw Brown and Darling outline a £500 billion bank rescue package - including guaranteeing inter-bank loans, offering more liquidity and buying into banks directly.
The Bank of England cut interest rates by 0.5 per cent in a part of an international move with Bank of Canada, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank.
Five days later the US, France and Germany copy the Brown formula. The same day the UK government announces £37 billion will be spent to buy into the merged Lloyds TSB/HBOS and Royal Bank of Scotland.
Aftermath
The financial crisis soon hit already troubled economies and brought on what appears to be a global recession.
Interest rates have now dropped to two per cent in the UK and could fall to 0% in the US, while sterling has tumbled against the dollar and the euro.
New levels of financial regulation are proposed and the sheer size of the financial mismanagement and the fallout remain astounding.
Government are now left trying to mop up the remains of the crisis - cutting taxes and increasing spending to restart economies, while still pushing banks to restart lending.
The full effect of September 2008 will be felt for years to come, and no one has ruled out more banks still falling.
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