The World Banking Crisis, Five Years On
On the fifth anniversary of the global banking crisis, David Buik says that, while the situation looks grave, there is still hope.
Last Saturday Great Britain witnessed, without doubt, the finest compendium of sporting excellence from its Olympians in living memory! It had everything - breathtaking levels of achievement, the heights of emotion and unparalleled joy. Above all else, the British people provided the best evidence imaginable of what they were capable of achieving - delivering success in spades and showing that, in times of adversity, we CAN do it.
It is ironic that, on Thursday, the world reluctantly recognises that August 9 is the fifth anniversary of the global banking crisis and credit crunch.
It was first flagged up in the US in February 2007 by HSBC, which expressed its concern about Household, the high-risk lender, for which it paid $15bn (£9.6bn). Impairment charges were growing by the day. Within a year, the US was experiencing the sub-prime crisis, which triggered the deepest global recession seen since 1929. Few countries were immune from this toxic financial plague, though Australia and Canada did well not be contaminated. What the US experienced was very different to what was experienced here in the UK.
I can recall in the spring of 2007 walking in to our dealing room and seeing Northern Rock's name printed in large capitals on our order board - "Show me the offer!" What did that mean, I inquired. "Well, mate" came the answer, "Banks are reluctant to lend Northern Rock any period money through the wholesale money markets, because they perceive that Adam Applegarth's ambitions have overstepped the mark and its balance sheet is too big, with gargantuan loans being funded by short term money!"
Consequently, when a substantial loss was posted by Northern Rock in August 2007, the writing was on the wall. So when large queues starting forming outside many of the branches of Northern Rock in November of 2007, it did not take long for the penny to drop with me. The party was over.
Governments, banks and regulatory bodies around the world had just one common denominator - They ALL listened to Alan Greenspan, the erstwhile chairman of the Federal Reserve. To avoid the US entering recession at the turn of the century, he encouraged banks to lend indiscriminately to all comers, thus encouraging "light-touch" and dangerously loose regulatory controls.
The rest is history.
Here in the UK, we suffered at the hand of poor credit analysis. Northern Rock was the catalyst, with Bradford & Bingley falling in its wake. Alliance Leicester was severely damaged in their slipstream, rather than any misdemeanour on its part and then RBS, Lloyds Banking Group and HBoS grabbed all the headlines, as they were bailed out for a total of £70bn by the taxpayer in the autumn of 2008.
Suffice to say that this episode of the credit crunch was not the result of the US sub-prime crisis as suggested by the then PM, Gordon Brown. It was a combination of Labour's profligacy, inadequate regulatory controls and ridiculously easy access to credit for the consumer. Though Gordon Brown exacerbated the Northern Rock drama by prevaricating over the course of action to be taken, Chancellor Alistair Darling's handling of a very tricky situation was exemplary as was the Bank of England's deft and unobtrusive handling of liquidity, which prevented the total collapse of the global banking system - for that full credit to Governor Mervyn King, Paul Tucker and Andy Haldane.
There is no doubt at all that the sub-prime crisis in the US severely damaged the balance sheets of most global banks.
Though Hank Paulson, the US Treasury Secretary started well is persuading JP Morgan to garage Bear Stearns and Washington Mutual and then organising the $180bn (£115bn) bail-out of AIG as well as protecting the affairs of Freddie Mac and Fannie Mae, his decision to let Lehman Brothers go in September 2008, citing bank debt of $613bn (£392bn), $155bn (£99bn) in bond debt, and assets worth $639bn (£408bn), was illogical and it exaggerated the losses made by many bank counterparties. In fairness, superficially the US has cleaned up its banking act rather better than Europe - which is still drowning in sovereign debt - has.
So here we are five years later, facing probably greater problems than the world was looking at in 2007/8. There was a swift recovery in 2009, though it looks to be short-lived. Debt - whether consumer, bank or government led - remains the greatest threat to democracy and civil unrest in the 21st Century.
Notwithstanding all these obstacles, the Government has a heaven-sent-chance of galvanising the country in to a recovery mode by capitalising on the positive sentiment created from London 2012. The government must work with the banks to make it easier for business to get the funding it requires.
Everyone is heartily sick of hearing our politicians constantly carping and bleating how awful life here in Old Blighty is. Our leaders, above all else, in times of recession, must become disciples of a "positive mental attitude", thus lifting sentiment and, above all, raising the level of confidence.