Read Online Storm, The by Vincent Cable - Free Book Online
Authors: Vincent Cable
Tags: Finance
Ads: Link
on to their balance
sheets previous securitizations from insurance companies and pension funds, some with big losses. Furthermore, as they triedto raise capital in order to meet their reserve requirements, they were forced to sell assets, thus driving down their prices,
especially as it became difficult to raise more capital from shareholders, who had become thoroughly scared. And as the economic
downturn intensified, with more defaults in mortgages, there were more losses and more pain, and confidence ebbed further.
In the quarter to the end of June 2008, US bank loans were contracting at an annual rate of 8 per cent. A similar process
was taking place in the UK.
These events were, however, merely the eddies that preceded the eye of the storm that hit Wall Street in the second week of
September. The explicit guarantees to Fannie Mae and Freddie Mac proved inadequate to prevent a loss of confidence, reflected
in collapsing share values. The two institutions, which provide 80 per cent of US mortgages, were deemed too big to fail and
were nationalized. The US state formally acquired institutions with assets of $1.8 trillion, wiping out their shareholders.
Nationalization formalized de facto state control. This was a striking event for an administration with an evangelical belief
in private-enterprise capitalism.
Then there was a collapse of confidence in Lehman Brothers, a venerable 158-year-old institution and the fourth-largest investment
bank in the USA. The US administration made the crucial decision to let it go bankrupt and not to help Barclays take it over
as a going concern. After rescuing Bear Stearns several months earlier, the decision was a carefully – if rapidly – calculated
gamble that the bank was insolvent and not merely illiquid, and that the failure of the bank would not result in widespread
systemic failure. The risk was a big one, since Lehman’s had a major role as counter-party in the credit derivatives market,
and critics have argued ever since that it should have been rescued (or nationalized). After the powerful signal that the
government would not automatically bail out investment banks, Merrill Lynch, whichwas also in trouble, sold out to the Bank of America for $50 billion, a tiny fraction of its pre-crisis value.
An even more dramatic intervention led to the state take over of the world’s largest insurer, AIG, with an $85 billion loan.
A small section of AIG had, independently, and perhaps without the knowledge of the insurance managers, succeeded in taking
on $450 billion of credit default swaps. Had the company been allowed to collapse, it would not only have dragged down large
chunks of the global insurance markets – grounding a high proportion of the world’s commercial aircraft – but would have had
a massive impact on banks and investment funds. Nationalization was seen as a lesser evil than letting AIG collapse.
It soon became clear that financial markets were in a state of blind, uncontrolled panic. Contagion could be seen in many
areas: a collapse in bank shares, allegedly fuelled by short-selling (that is, speculation by means of selling borrowed shares);
a leap in the cost of insuring against bank default; and the growing cost of borrowing because of an increase in the cost
of banks lending to one another. There was a flight to safe assets, notably government bonds, reflected in negative interest
rates on US Treasury Bills (that is, investors were willing to lose money on lending to the government rather than lend to
commercial money markets or banks). The panic was spreading well beyond the USA. In the UK, Bradford & Bingley collapsed and
was nationalized. Halifax–Bank of Scotland (HBOS) was heading the same way, had Lloyds TSB not launched a $22 billion takeover,
encouraged by the British government.
The crisis was reaching a critical stage. The situation was deteriorating by the day and was approaching the point at
sheets previous securitizations from insurance companies and pension funds, some with big losses. Furthermore, as they triedto raise capital in order to meet their reserve requirements, they were forced to sell assets, thus driving down their prices,
especially as it became difficult to raise more capital from shareholders, who had become thoroughly scared. And as the economic
downturn intensified, with more defaults in mortgages, there were more losses and more pain, and confidence ebbed further.
In the quarter to the end of June 2008, US bank loans were contracting at an annual rate of 8 per cent. A similar process
was taking place in the UK.
These events were, however, merely the eddies that preceded the eye of the storm that hit Wall Street in the second week of
September. The explicit guarantees to Fannie Mae and Freddie Mac proved inadequate to prevent a loss of confidence, reflected
in collapsing share values. The two institutions, which provide 80 per cent of US mortgages, were deemed too big to fail and
were nationalized. The US state formally acquired institutions with assets of $1.8 trillion, wiping out their shareholders.
Nationalization formalized de facto state control. This was a striking event for an administration with an evangelical belief
in private-enterprise capitalism.
Then there was a collapse of confidence in Lehman Brothers, a venerable 158-year-old institution and the fourth-largest investment
bank in the USA. The US administration made the crucial decision to let it go bankrupt and not to help Barclays take it over
as a going concern. After rescuing Bear Stearns several months earlier, the decision was a carefully – if rapidly – calculated
gamble that the bank was insolvent and not merely illiquid, and that the failure of the bank would not result in widespread
systemic failure. The risk was a big one, since Lehman’s had a major role as counter-party in the credit derivatives market,
and critics have argued ever since that it should have been rescued (or nationalized). After the powerful signal that the
government would not automatically bail out investment banks, Merrill Lynch, whichwas also in trouble, sold out to the Bank of America for $50 billion, a tiny fraction of its pre-crisis value.
An even more dramatic intervention led to the state take over of the world’s largest insurer, AIG, with an $85 billion loan.
A small section of AIG had, independently, and perhaps without the knowledge of the insurance managers, succeeded in taking
on $450 billion of credit default swaps. Had the company been allowed to collapse, it would not only have dragged down large
chunks of the global insurance markets – grounding a high proportion of the world’s commercial aircraft – but would have had
a massive impact on banks and investment funds. Nationalization was seen as a lesser evil than letting AIG collapse.
It soon became clear that financial markets were in a state of blind, uncontrolled panic. Contagion could be seen in many
areas: a collapse in bank shares, allegedly fuelled by short-selling (that is, speculation by means of selling borrowed shares);
a leap in the cost of insuring against bank default; and the growing cost of borrowing because of an increase in the cost
of banks lending to one another. There was a flight to safe assets, notably government bonds, reflected in negative interest
rates on US Treasury Bills (that is, investors were willing to lose money on lending to the government rather than lend to
commercial money markets or banks). The panic was spreading well beyond the USA. In the UK, Bradford & Bingley collapsed and
was nationalized. Halifax–Bank of Scotland (HBOS) was heading the same way, had Lloyds TSB not launched a $22 billion takeover,
encouraged by the British government.
The crisis was reaching a critical stage. The situation was deteriorating by the day and was approaching the point at
Similar Books
