Banking crisis

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*'''Bradford & Bingley''' Mortgages from B&B taken into public ownership by the British government on 29th September 2008, while the bank's £20billion in savings deposits, 2.7million customers and its 197 branches are sold to Spanish bank Santander.
 
*'''Bradford & Bingley''' Mortgages from B&B taken into public ownership by the British government on 29th September 2008, while the bank's £20billion in savings deposits, 2.7million customers and its 197 branches are sold to Spanish bank Santander.
 
* '''Belgian bank Fortis'''. One of the largest banks in the Low Countries. Rescued and part nationalised by Belgium, the Netherlands and Luxembourg.<ref>[http://www.iht.com/articles/ap/2008/09/29/business/EU-Belgium-Fortis-Downfall.php Fortis downfall]</ref>
 
* '''Belgian bank Fortis'''. One of the largest banks in the Low Countries. Rescued and part nationalised by Belgium, the Netherlands and Luxembourg.<ref>[http://www.iht.com/articles/ap/2008/09/29/business/EU-Belgium-Fortis-Downfall.php Fortis downfall]</ref>
 +
*'''Wachovia'''. Bought out by City group.<ref>[http://money.cnn.com/2008/09/29/news/companies/wachovia_citigroup/?postversion=2008092913 Wachovia bought out]</ref>
  
 
==In the firing line==
 
==In the firing line==
  
*'''Wachovia'''
 
 
*'''National City Corporation'''<ref>[http://www.guardian.co.uk/business/2008/sep/26/banking.creditcrunch1 Wachovia and National City Corporation problems]</ref>
 
*'''National City Corporation'''<ref>[http://www.guardian.co.uk/business/2008/sep/26/banking.creditcrunch1 Wachovia and National City Corporation problems]</ref>
 
  
 
===Rationalwiki's hot tip for shares to short-sell now===
 
===Rationalwiki's hot tip for shares to short-sell now===

Revision as of 18:19, 29 September 2008

A banking crisis usually refers to a situation in a general "market adjustment" when faith in banking institutions falls, and people start trying to move their money to other places for safe keeping. This is called a "run on the banks". It can also occur due to overextending low quality loans, which in a down market can become essentially worthless.

The most famous banking crisis in modern history led to the Great Depression, which only massive government deficit spending on World War II was able to turn around.

Contents

2007 - 2008

One of the primary policy decisions that led to the banking crisis (aka The Credit Crunch) that began to appear in 2007 and seriously damaged financial markets around the world in the fall of 2008 was the Commodity Futures Modernization Act of 2000.[1] This Act paved the way for a number of risky investment practices, including the exemption from regulation of over-the-counter energy trades and trading of energy on electronic markets which directly led to the Enron affair. The Act also specifically banned the regulation of credit default swaps, an unregulated form of institutional insurance for those who invested in the mortgage markets. Further deregulation of the US credit and investment markets, led by Phil Gramm amongst others enabled many US lenders to make risky lending decisions, primarily high-interest rate mortgages to the "sub-prime" sector - people who typically have "No Income, No Assets" and no chance of making repayments should they fall on hard times or if interest rates increase.

Investment banks around the world, over-confident of market conditions then securitized much of this debt, and then repackaged groups of sub-prime accounts and sold them on again. The end result was that everyone was making money from US sub-prime mortgages, but nobody knew how much, and they certainly didn't know the true risk of their portfolios.

Eventually, the inevitable crunch happened, and many people started to default on their mortgages. This lead to a rapid wave of panic that swept investment banks the world over, as each tried to unpick the complicated "structured investment vehicles" that contained the mortgage accounts, to understand just how much money they were losing. The results were staggering; by March 2008, losses were in excess of $82billion and continued to rise.

Around the world, the banks who traditionally lent money to each other to do business stopped doing so. The loss of liquidity in the markets meant that many organisations stopped lending money to consumers, and so consumer driven economies such as the US and UK experienced a significant slowdown.

As of September 2008, the US government is trying to push through a $700billion rescue package to try to tackle the crisis before the US economy (and by extension, the world's economies) from plunging into recession.

Casualties of the crisis

As the losses started to mount, many banks faced hard times; some collapsed; some were nationalised and some were swallowed up by larger rivals. By September 2008, over 284 banks and lenders worldwide had collapsed, the largest ones being:

  • Bear Stearns - One of the first to appeal to the US government for help, Bear Stearns was propped up by the US government and eventually sold to JP Morgan.
  • Northern Rock - A large UK bank and mortgage lender, Northern Rock had a business model where it borrowed money from larger banks in order to extend mortgages to its borrowers. When the markets lost liquidity, it borrowed £25billion from the Bank of England, but even this failed to save it. Eventually in early 2008, the UK government nationalised the bank, leaving thousands of shareholders with nothing and costing 2000 jobs.
  • Fannie Mae and Freddie Mac - The two largest US mortgage lenders were taken over by the US government in a similar manner to Nothern Rock, except on a much larger scale. The two banks, which guarantee about half of the US mortage market (worth a cool $12trillion) were nationalised in September 2008, costing the Federal government a potential $200billion.
  • Lehman Brothers - Up to the credit crunch, Lehman was the fourth largest investment bank in the US, but it fell victim to the crisis and filed for Chapter 11 bankruptcy protection in September 2008. Previously, it had approached the Korean Investment Corporation for backing, who wisely walked away when it became clear how exposed Lehman were to the crisis. Thousands of jobs were lost, although UK bank Barclays picked up some of the US assets.
  • Merrill Lynch - Another major investment bank, Merrill Lynch actively sought to be taken over by Bank of America in order to prevent its own collapse (Merrill had already written off $50billion due to sub-prime losses, and had failed to secure overseas investment). The deal was worth a bargain basement $50billion.
  • AIG (American International Group) - The biggest insurance group in the US, AIG was rescued by the US Federal Reserve to the tune of $85billion, effectively nationalising the company.
  • HBOS (Halifax Bank of Scotland) - In September 2008, the UK's largest mortgage lender, HBOS, came under scrutiny from investors, concerned at it's exposure to the slowdown in the UK market. As a result, its shares plummeted and it was taken over by rival bank Lloyds TSB in a deal worth only £12billion. Such a takeover would have been impossible before the credit crunch, as UK competition laws would have prevented a merger of two of the largest UK banks.
  • Morgan Stanley, reverted to bank holding company status with Goldman Sachs.[2]
  • Goldman Sachs - the last two major investment banks fell in mid September 2008, reverting to bank holding company status. [3]
  • Washington Mutual - At the end of September 2008, WaMu was closed by its regulators and sold to JP Morgan for a pocket-change amount of $1.9billion. With assets of $307billion, but deposits of only $188billion, it was the largest bank to fail to date, and its aquisition by JP Morgan meant that the latter is now the second largest bank in the US. [4]
  • Bradford & Bingley Mortgages from B&B taken into public ownership by the British government on 29th September 2008, while the bank's £20billion in savings deposits, 2.7million customers and its 197 branches are sold to Spanish bank Santander.
  • Belgian bank Fortis. One of the largest banks in the Low Countries. Rescued and part nationalised by Belgium, the Netherlands and Luxembourg.[5]
  • Wachovia. Bought out by City group.[6]

In the firing line

  • National City Corporation[7]

Rationalwiki's hot tip for shares to short-sell now

  • HSBC - (Hongkong and Shanghai Banking Corporation) - You heard it here first. Update 26/09/08 [8]

The moral of this story

Deregulation in one part of the economy has had far reaching consequences, causing a global slowdown in the money markets and a knock on effect to consumers. It has treated us to the somewhat bizarre spectacle of a particularly right-wing Republican government nationalizing vast swathes of the American economy, to the point where the United State Government now not only owns about half of the mortgaged properties in the US, but also is in the business of insuring against defaults on those very same properties - a potential 'double-whammy' of monstrous proportions. At this juncture, the slinging about of phrases like 'House of Cards' might not be considered inappropriate.

Let's make it bleeding obvious

Free market libertarianism doesn't work. At all. Keynesian policies enacted since the Great Depression have prevented what used to be a common occurrence in "free markets" - disastrous contractions which created extreme hardship - even though the market players and their political tools continue to try to break things, most notably via supply side economics and deregulation of financial institutions.

Hypocrisy

In October 2007 Bush vetoed the "SCHIP" children's health insurance bill because it would have appropriated $30billion dollars more than the President requested, on the grounds that spending that much money was socialism, pure and simple. But let his Wall Street buddies get into trouble and all of a sudden we need to give a blank check worth $700billion dollars to Henry Paulson (and his successors) with the following language, which is actually contained in the three-page proposal sent to Congress, and which has made the "liberals" balk:

"Decisions by the Secretary [of the Treasury] pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

References

  1. http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000
  2. http://www.marketwatch.com/news/story/goldman-sachs-morgan-stanley-become/story.aspx?guid=%7BCB72201A%2DA795%2D4C78%2D8F68%2DE64DAA26398D%7D
  3. http://www.marketwatch.com/news/story/goldman-sachs-morgan-stanley-become/story.aspx?guid=%7BCB72201A%2DA795%2D4C78%2D8F68%2DE64DAA26398D%7D
  4. http://news.bbc.co.uk/1/hi/business/7637026.stm
  5. Fortis downfall
  6. Wachovia bought out
  7. Wachovia and National City Corporation problems
  8. Bank giant HSBC axes 1,100 jobs
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