…and it all ended in tears

The US housing bubble finally burst when people realised how much the market was overvalued, and house prices started to fall. Interest rates were already on the rise, sparking the first wave of sub-prime defaults in late 2006. By March 2007 Wall Street was panicking, and by August the crisis was beginning to unravel across the world. Banks that had bought mortgage-backed securities (including those in the US, UK, Germany, France and Australia) realised that they, and the credit-rating agencies that they had employed, had massively underestimated their exposure to risk. No one wanted to buy securities any more, and their market value plummeted, along with the share prices of the companies that held them. The financial institutions that had lent the vast sums to the banks now wanted to ‘deleverage’ themselves and turn their loans back into capital. In other words, they wanted their money back. Some of the banks in question faced insolvency (not being able to pay back their creditors) and many had liquidity problems (not having enough available money to meet their day-to-day needs). Banks no longer trusted one another and refused to lend to each other; the credit crunch had set in. No bank was beyond suspicion of going bust as a result of the ‘toxic debt’ that potentially lurked within them.

February 2008 saw the first bank run in Britain in 150 years as Northern Rock fell victim to the credit crunch—it ended up having to be nationalised by the British government. The bank wasn’t riddled with sub-prime debts, but it had relied for 73% of its funding on loans from international money markets, so when these froze up it had nowhere to turn but the Bank of England. Next to go was US investment bank Bear Stearns in March, which was bought up by JP Morgan after its share price plummeted. The summer break provided a brief respite, but in September heads really began to roll. American mortgage financers Fannie Mae and Freddie Mac were bailed out by the US government in the biggest nationalisation in history; Lehman Brothers was allowed to collapse (which caused even more panic); insurers AIG were bailed out by the Federal Reserve; Bank of America bought out Merrill Lynch; Goldman Sachs and Morgan Stanley surrendered their status as investment banks and Washington Mutual went into receivership. In the UK, Lloyd’s took over HBOS and Bradford & Bingley was nationalised, while the Icelandic government was forced to nationalise its three biggest banks and the turmoil spread around Europe. By early October the global banking system was on the verge of total meltdown, needing enormous cash injections from governments worldwide to keep it functioning. Interest rates were cut to encourage borrowing and lending, but the world slid into recession nevertheless: companies went into administration, demand for goods slowed, jobs were cut and house prices sank, causing widespread negative equity and further mortgage defaults.

British banks were ?740 billion in debt, prompting Gordon Brown to pledge taxpayers’ money to recapitalise them to stop them going broke, and provide them with short-term loans and loan guarantees to encourage them to start issuing credit again. He also set up an Asset Protection Scheme, a sort of insurance policy for the banks in which the UK government absorbed further losses from toxic debt exposures in exchange for a fee. By May 2009, it was estimated that British taxpayers owned 65% of the merged Lloyd’s-HBOS and 95% of Royal Bank of Scotland (the largest company in the world by asset size), which had suffered the biggest loss in British corporate history the previous year.

Данный текст является ознакомительным фрагментом.