How $100,000,000,000.00 vanished...

Discussion in 'Financial Cents' started by Jonas Parker, Jan 2, 2008.

  1. Jonas Parker

    Jonas Parker Hooligan

    From the sub-prime to the ridiculous: how $100bn vanished

    Mighty institutions and powerful figures undermined by pitiful little property deals
    David Teather
    The Guardian,
    Monday December 31 2007
    It began with low-income Americans being encouraged to borrow mortgages they couldn't afford.
    The economic butterfly effect would eventually cause deals worth billions of dollars to fall apart; the first run on a British bank in 140 years; some of the most powerful figures on Wall Street losing their jobs; wild gyrations on the markets; and dire warnings that the world is on the brink of recession.
    At the start of the year, stockmarkets were at six-year highs and £40bn worth of mergers and takeovers were awaiting completion. Private equity firms and hedge funds were gorging themselves on cheap money and a handful of secretive, hugely wealthy individuals were becoming increasingly influential. But it was the millions on more modest incomes who would ultimately shape the events of 2007.
    As the US housing market cooled and interest rates rose, many on the bottom rungs of the economic ladder found it difficult to meet their monthly mortgage repayments.
    The first real concerns about sub-prime mortgages emerged at the end of February, when Wall Street suffered its worst day since the terrorist attacks of 2001. By April one of the biggest sub-prime mortgage lenders in the US had gone bankrupt and there was talk of a full-blown crisis. Credit more broadly began to dry up as lenders became nervous.
    Fear also spread as it became clear that much of the bad debt had been packaged up and sold on around the world's financial system. Nobody, not even the banks themselves, knew who owned the toxic debt.
    Some otherwise arcane practices of the financial world such as collateralised debt obligations and structured investment vehicles suddenly became everybody's concern.
    The flood of private equity money turned into a trickle as it became more difficult to borrow, derailing deals including an attempt to buy J Sainsbury and, at the close of the year, an attempt by Lord Harris to take Carpetright private. Hedge funds too, which rely on leveraging their funds, have had their wings clipped.
    The credit crunch was behind the biggest story of the year, Northern Rock. It emerged in September that the bank had been forced to apply to the Bank of England for emergency funds as liquidity had dried up in the market. Savers were told not to panic. But they did anyway. The next day, there were long lines of people threading through high streets across Britain, hoping to retrieve their cash.
    The scenes triggered a postmortem into how a major bank - the fifth biggest provider of mortgages in the country - could reach the brink of collapse without any apparent action to prevent it from going under.
    The inquest has so far given us the phrase "moral hazard" from the governor of the Bank of England, Mervyn King, who believed it was outside his remit to rescue a bank that had got into difficulties through risky borrowing on international money markets. It has also given us the sight of MPs from the Treasury select committee grappling to discover who from the much lauded tripartite structure of regulation for the UK financial system - the Bank of England, the Treasury and the Financial Services Authority - was to blame for the fiasco.
    But it has not given us any definitive answers save that Northern Rock should not have risked so much on such a finely calibrated business model and should have seen it coming.
    King came under pressure to quit but no one from the tripartite system has fallen on their sword. Even the architect of the business model, Northern Rock's chief executive Adam Applegarth, hung on until the middle of November when he finally resigned.
    The stricken bank has received £25bn of taxpayers' cash. There are still two potential bidders - Sir Richard Branson's Virgin and the Olivant vehicle led by former Abbey National boss Luqman Arnold. Other options include nationalisation or a carve-up among high street banks.
    As the mortgage crisis spread, Wall Street bosses began dropping like neatly lined-up dominoes. Stan O'Neal was forced out at Merrill Lynch and Charles Prince was ousted from the world's largest banking group, Citigroup. The most powerful woman on Wall Street, Zoe Cruz, lost her job at Morgan Stanley when the bank recorded losses of $3.7bn. Another Wall Street bank, Bear Stearns, suffered the first loss in its 84-year history.
    The numbers just kept getting bigger. This month the Swiss bank UBS wrote off a further $10bn of sub-prime loans, on top of $3.4bn already announced. Two days later the Bank of England joined other central banks in pouring £50bn into the financial markets in the hope of staving off a meltdown. A succession of Wall Street banks have turned to sovereign funds in China, Singapore and the Middle East for injections of cash. The unravelling of events has been a stunning example of how interdependent the world economy has become.
    Confidence appears to be ebbing. Retailers in Britain were forced to slash prices before Christmas to shift stock. According to the Royal Institute of Chartered Surveyors, house prices in Britain are falling at their fastest rate in two years. The outlook for jobs is the worst for a decade. Jon Hunt, who sold the estate agency Foxtons in April, may, it turns out, have called the top of the market
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