It started towards the end of 2006 and snowballed into one of the largest economic busts in recent US history. Subprime lending is a tool by which banks and lenders hope to get more lenders by having very low rates of interest. Collateral, risk assessments and the usual screening process for normal loans are either less lenient or non-existent.
Towards the end of 2006, the US housing market was experiencing a downturn, which pushed lenders to highlight subprime lending and decrease the criterion for getting a loan. At this time the interest rate was at a new low, so subprime lending became even more popular – its main target has always been that section of the general population least likely to get a loan in the first place, and those who wouldn’t normally have access to collateral. Those with bad credit ratings or who are below a certain income level are the perfect candidate, and 2006’s Fountain of Subprime wasn’t about to give up on that custom. We’re not talking about small amounts of money either – hundreds of thousands of dollars per person.
What this then led to was a huge level of foreclosures and a general failure to repay the loans. Banks had lent to those who shouldn’t have received the money, and now what were they going to do? Twiddle their thumbs, it would seem. The housing market didn’t take long to bust, dragging parts of the banking and finance industries down with it.
HSBC reports that their share of bad debt at this point was $10.5 billon, but they were quick to note that this was the only aspect of their regular activity affected by the collapsing US housing market. BBC’s business editor sounds a note of caution however, saying this loss was “a warning to other banks to watch out.”
New Century is the first of the US subprime lenders to go bankrupt, making headlines, causing ripples across the Atlantic and panicking analysts everywhere. It cuts thousands of jobs – this will soon become a common news story for the next two and a half years. US investment bank Goldman Sachs and Barclays Bank in the UK are the main investors in New Century; naturally both are reeling from the declaration. The ripples are starting to form more clearly now.
Ripple effects are felt in Europe as banks are feeling the pinch. Bad debts increase and quarterly losses are reported. Societe Generale analyst Ciaran O’Hagan tells Dow Jones’ Newswires: “The longer-term fear is that these liquidity issues could spill into the wider economy…The prompt intervention of central banks puts off the day of reckoning.”
The European Central Bank pumps in €95 billion in the form of loans – several banks and financial institutions accept, and this alleviates the problem for a time. French BNP Paribas and Dutch NIBC are the worst affected in the continent but both put on brave faces. NIBC faces a loss of €137 billion in the first half of the year and attributes this to the housing market collapse and the failures of subprime lending in the US.
Needless to say, this does nothing to improve animosities towards the US. While statements are being made tying the collapse of banking structures and systems to the housing collapse, all are still confident that this is just a minor bump in a long and prosperous road ahead.
British mortgage lender Northern Rock begins its rapid and infamous descent. The banks specialises in mortgages, savings accounts, loans and insurance.
In 2006 it begins to enter the world of subprime lending, in partnership with the Lehman Brothers. After the collapse of the housing market in the US and the ripple effects felt by Lehman, Northern Rock experiences the first in a series of financial shocks.
The Bank of England steps in to provide some liquidity, and begins its bid to nationalise. This makes headlines not only for the obvious reasons that it’s a bank losing money and needing government help; but also because it’s the first British bank to receive help from what’s known as the Tripartite Authority. That’s the Bank of England, City of London watchdog the Financial Services Authority and HM Treasury.
Clients naturally panic and queue up outside branches across the country to remove their money; many are unable to access their online accounts though the bank reassures this has nothing to do with its operations. The FSA states that these problems are “entirely logistical and are in no way related to the bank’s solvency or its underlying ability to deliver funds to savers who wish to withdraw.” Nearly £1 billion is removed, according to the BBC, and faith in the banking sector crumbles.
Northern Rock is nationalised in February 2008; it vows to repay the government debt in 3-4 years. They fire staff across the nation and tell potential mortgage loan customers to look elsewhere. This causes banking clients across the nation to look deeply into the actions of their own banks and consider the implications for the industry as a whole. Faith in the banking sector is seriously diminished and all spotlights are now on the City of London and the nation’s banks.
It’s all looking a little brighter, with the DOW at a high of 14, 279.96. But it seems it’s too early to start smiling.
Banks are slowly reporting losses and looking for help wherever they can find it. Swiss UBS reports losses of $3.4 billion due to its investments in subprime mortgages.
Citibank reports losses of $3.1 billion; within six months this will become $40 billion.
US Merill Lynch reports $7.9 billion of bad debt. All are looking to their governments and other banks for salvation.
The Bank of England reduces interest rates to 5.5%; the US Federal Reserve offers billions of dollars as bank bailouts.
Central banks across the globe are repairing their banking sector through loans, bailouts and proposed nationalisation. The European Central Bank offers $500 billion to its banks over the Christmas period.
The crunch doesn’t seem to stop as the World Bank warns of slower growth this year. http://news.bbc.co.uk/2/hi/business/7177397.stm
The global stock market suffers a huge crash, the largest since 9/11. The ripple effects are felt across the world. http://news.bbc.co.uk/2/hi/business/7199552.stm
The Federal Reserve slashes interest rates to 3.5% in a bid to prevent a recession; this is the largest cut in 25 years and the first emergency cut since 2001.
The Bank of England cuts interest rates again, to 5.25%.
G7 leaders say that losses from the collapse of the sub-prime lending industry could reach $400 billon.
Northern Rock in Britain is nationalised.
US investment bank Bear Stearns is sold to rival JP Morgan chase for a small fraction of its original share price – $2 a share. The Federal Reserve lends $30 billion and lowers its discount rate to 3.25%. This is the rate at which money is lent to the financial sector. The deal is made, and JP Morgan chase buys Bear Stearns for $236 million. A year ago, the firm was worth $18 billion. Shares have gone down 98% because of its involvement in the subprime lending industry.
Stock markets across the world react badly – Japan’s Nikkei is down by 4%, London’s FTSE loses 100 points as soon as it opens, and the Hang Seng is down 5%.
This is just the start of the slow collapse of Wall Street businesses and Fed bailouts. The credit crunch is a result of bank’s cautious financial operations after the crash in the US housing market and subprime lending.
The IMF states that the credit crunch could lead to losses of over $1 trillion; the BBC reports that “the effects are spreading from sub-prime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.”
The Bank of England once again slashes interest rates down to 5%, and propose a £50 billion plan of bank bailouts.
Stimulus checks increase in number in the US and Britain. The situation elsewhere in the world has not yet reached this level of crisis. Bank bailouts and declarations of bankruptcy have occupied headlines for some months. Corporations are getting gloomy about the future, with the British Chamber of Commerce declaring: “The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected.”
Fannie Mae and Freddie Mac, the two largest mortgage finance companies in the US, are due for a large Congress bailout. It plans to expand the access to credit and give the Treasury shares in the companies, to ensure further catastrophe is at least delayed. The Fed has also pledged further financial assistance, should the situation require it. Together, the two firms control nearly half the housing loans – over $5 trillion of debt. Shares have dropped significantly in both firms – Fannie Mae fell 5.1% (to $9.73) and Freddie Mac fell 8.3% (to $7.11). If these two failed, the repercussions in the US housing market – and therefore its banking system, and therefore the global financial structure – would be disastrous.
Denmark’s GDP shrinks 0.6% and then 0.5% and is the first European country to declare itself in a recession.
Estonia declares itself in recession after dips in growth of less than 1%.
The DOW spirals down to 777.68. Washington Mutual investment – with asset values of $307 billion – declares bankruptcy and labour markets become the new target.
Unemployment rates in the US are 6.1%. The British Treasury injects £175,000 into the housing economy in a bid to boost spending.
Fannie Mae and Freddie Mac receive their bailout, one of the largest in US history.
The Lehman Brothers, one of the most prominent Wall Street banks, files for Chapter 11 bankruptcy. It is the first major bank to collapse in the depression. Alan Greenspan, former Chief of the Fed, warns that this is “probably a once in a century type of event” and that more firms will follow suit.
Merrill Lynch also falls, and is bought over by Bank of America for $50 billion.
The Fed rescues AIG, the nation’s largest investment firm, for $85 billion.
In a momentous decision by US courts, a rescue plan for the financial system is being drafted, titled the Emergency Economic Stablilization Act. If passed, it will allow the Treasury to spend up to $700 billion on buying up banks and bailing out industries. The House of Representatives rejects this plan, sending panic across the globe.
Dow falls 7% in a day, the largest ever fall in such a short period of time.
In the UK, Lloyds TSB bank takes over Britain’s largest mortgage lender HBOS, for £12 billion. This creates a company controlling a third of Britain’s savings and mortgage market. Bradford & Bingley, mortgage lender, is nationalised.
European banks start to feel the pinch – Iceland’s banking comes under strain after its third largest bank, Glitnir, reports losses. Belgium, France and Luxembourg decide to keep Dexia, a large European bank, from sinking.
Ireland, New Zealand and Latvia declare themselves in recession with falls in growth of 0.2-0.3%, 0.3% and 0.2-0.3% respectively.
The House of Representatives finally passes the $700 billion Stabilization Act to rescue the financial industry. Nine US banks receive aid from the Treasury – up to $123.3 billion.
Britain, Germany and Iceland announce recovery packages and plans to save their banking sectors.
The Fed, ECB, Bank of England; as well as Sweden, Switzerland and Canada’s central banks all cut their interest rates have a percentage point.
The G7’s 5-Point Plan of Action is laid out [http://news.bbc.co.uk/2/hi/americas/7664790.stm], while British and American governments are putting aside money to nationalise the largest banks in their respective countries.
The Dow falls 733 points, the largest percentage fall since 1987, the BBC reports.
Singapore is in recession, after growth rates fall by 6.8%.
Britain and Europe slash interest rates to 3% and 3.25%, respectively. These are all-time lows for both zones. British VAT is now 15%, down from 17.5%. The European Commission announces a €200 billion recovery package.
A $586 billion stimulus package is proposed by the Chinese government to protect its industry.
G20 leaders discuss means to counter the depression in a summit in Washington. Citigroup receives $20 billion from the US government. The Fed announces a further injection of $800 billion. Barack Obama is elected as the next US president, affecting a small upturn in the US stock market.
Germany, Italy, Hong Kong, Japan, Sweden and the Euro-Zone are in a recession after a fall of 0.5%, 0.3%, 0.5-1.4%, 0.9% and 0.1% respectively.
After a crisis lasting nearly two years, the US government considers that something may be wrong and declares that a recession is on. A recession is a dip in growth for over two consecutive quarters.
ECB, Bank of England join Sweden and Denmark’s central banks in slashing interest rates further. The French government displays a €26 billion stimulus package.
The Fed’s interest rates are at an all-time low of 0.25% – 1%. Part of the government’s stimulus package will go to bailing out the automobile industry, it is revealed.
British interest rates are now 1.5%, the lowest in its history. £20 billion is set aside as loans for small businesses. Britain has officially entered recession.
Germany unveils a €50 billion stimulus package.
ECB interest rates are now 2%.
Barack Obama is sworn in as 44th President of the United States and pledges a solid recovery package where 80% of the spending will be done in 18 months.
The IMF warns that global economic growth will be at a new low since World War Two – 0.5%. International Labour Organisation reports that up to 51 million jobs will be lost in the comin year.
BofE’s interest rates are further slashed to 1%.
The US signs a new $787 billion stimulus plan, which the president claims is “the most sweeping recovery package in our history.”
Leaders pledge to pull their countries out of recession at a G20 summit. The Fed buys over $1 trillion of bad debt.
Dow closes below 7,000.
The G20 summit in London leads to a consensus – over $1 trillion is pledged to counter the recession.
Chrysler, one of the largest automobile manufacturers in the US, declares bankruptcy. GM requests protection from bankruptcy, and receives an extra $50 billion. 10 US banks require an additional injection, and altogether the new total reaches $74.6 billion.
European and British markets are set to shrink this year.
Oil consumption is at an all-time low.
Ten of America’s banks project that they will be able to pay back their debts. A new banking regulation plan is floated in the political corridors and looks set to become law.
OECD predicts that 30 of the world’s richest nations will see growth rates of -4.1%.
GM announces that it no longer requires bankruptcy protection; 61% of the company belongs to the government. Goldman Sachs announces a net profit of $3.44 billion. Several prominent US banks announce net profits.