A year ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries.
Defined as “a severe shortage of money or credit”, the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realise how serious the situation was.
The problems, however, started much earlier.
GROWING SUB-PRIME PROBLEMS
After a two year period between 2004 and 2006 when US interest rates rose from 1% to 5.35%, the US housing market begins to suffer, with prices falling and a rise in homeowners defaulting on their mortgages.
Default rates on sub-prime loans – high risk loans to clients with poor or no credit histories – rise to record levels.
APRIL-AUGUST 2007: SUB-PRIME CONTAGION
The credit losses associated with sub-prime have come to light and they are fairly significant…Some estimates are in the order of between $50bn and $100bn of losses
Ben Bernanke, Chairman US Federal Reserve, speaking on 20 July 2007
New Century Financial, which specialises in sub-prime mortgages, files for Chapter 11 bankruptcy protection and cuts half of its workforce.
As it sold on many of its debts to other banks, the collapse in the sub-prime market begins to have an impact at banks around the world.
Investment bank Bear Stearns tells investors they will get little, if any, of the money invested in two of its hedge funds after rival banks refuse to help it bail them out.
Federal Reserve chairman Ben Bernanke follows the news with a warning that the US sub-prime crisis could cost up to $100bn (£50bn).
AUGUST 2007: SCALE OF THE CREDIT CRISIS EMERGES
9 August 2007
BNP’s statement is scary, to put it mildly
BBC Business Editor, Robert Peston
Read Robert’s 9 August blog
BNP Paribas’ statement
Investment bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them, owing to a “complete evaporation of liquidity” in the market.
It is the clearest sign yet that banks are refusing to do business with each other.
The European Central Bank pumps 95bn euros (£63bn) into the banking market to try to improve liquidity. It adds a further 108.7bn euros over the next few days.
The US Federal Reserve, the Bank of Canada and the Bank of Japan also begin to intervene.
The Fed cuts the rate at which it lends to banks by half of a percentage point to 5.75%, warning the credit crunch could be a risk to economic growth.
UK sub-prime lenders begin to withdraw mortgages or put up the cost of borrowing for UK homeowners with poor credit histories.
German regional bank Sachsen Landesbank faces collapse after investing in the sub-prime market; it is sold to larger rival Landesbank Baden-Wuerttemberg.
SEPTEMBER 2007: A RUN ON A BANK
German corporate lender IKB announces a $1bn loss on investments linked to the US sub-prime market.
The rate at which banks lend to each other rises to its highest level since December 1998.
The so-called Libor rate is 6.7975%, way above the Bank of England’s 5.75% base rate; banks either worry whether other banks will survive, or urgently need the money themselves.
The fact that it has had to go cap in hand to the Bank is the most tangible sign that the crisis in financial markets is spilling over into businesses that touch most of our lives
Robert Peston, BBC business editor
Read Robert’s 13 September blog
The BBC reveals Northern Rock has asked for and been granted emergency financial support from the Bank of England, in the latter’s role as lender of last resort.
Northern Rock relied heavily on the markets, rather than savers’ deposits, to fund its mortgage lending. The onset of the credit crunch has dried up its funding.
A day later depositors withdraw £1bn in what is the biggest run on a British bank for more than a century. They continue to take out their money until the government steps in to guarantee their savings.
The US Federal Reserve cuts its main interest rate by half a percentage point to 4.75%.
After previously refusing to inject any funding into the markets, the Bank of England announces that it will auction £10bn.
OCTOBER 2007: MAJOR LOSSES BEGIN TO EMERGE
Swiss bank UBS is the world’s first top-flight bank to announce losses – $3.4bn – from sub-prime related investments.
The chairman and chief executive of the bank step down. Later, banking giant Citigroup unveils a sub-prime related loss of $3.1bn. A fortnight on Citigroup is forced to write down a further $5.9bn. Within six months, its stated losses amount to $40bn.
Merrill Lynch’s chief resigns after the investment bank unveils a $7.9bn exposure to bad debt.
NOVEMBER 2007: UK HOUSING MARKET ‘TURNS DOWN’
The Bank of England reveals the number of mortgage approvals has fallen to a near three-year low.
The Council for Mortgage Lenders (CML) issues the starkest warning yet of the impact of the credit crunch on the mortgage market, saying that without more funding available on financial markets, mortgage lenders will not be able to offer as many mortgages.
DECEMBER 2007: HELP IS AT HAND
US President George W Bush outlines plans to help more than a million homeowners facing foreclosure.
The Bank of England cuts interest rates by a quarter of one percentage point to 5.5%.
The US Federal Reserve co-ordinates an unprecedented action by five leading central banks around the world to offer billions of dollars in loans to banks.
The Bank of England calls it an attempt to “forestall any prospective sharp tightening of credit conditions”. The move succeeds in temporarily lowering the rate at which banks lend to each other.
The central banks continue to make more funding available.
There is a $20bn auction from the US Federal Reserve and, the following day, $500bn from the European Central Bank to help commercial banks over the Christmas period.
NEXT UP: THE BOND INSURERS
Ratings agency Standard and Poor’s downgrades its investment rating of a number of so-called monoline insurers, which specialise in insuring bonds. They guarantee to repay the loans if the issuer goes bust.
There is concern that insurers will not be able to pay out, forcing banks to announce another big round of losses.
9 January 2008
The World Bank predicts that global economic growth with slow in 2008, as the credit crunch hits the richest nations.
A rush to withdraw money from its commercial property funds forces Scottish Equitable to introduce delays of up to 12 months for investors wanting to take their money out.
It blames the rush of withdrawals on concerns about the US sub-prime mortgage collapse, recession worries and interest rates.
Global stock markets, including London’s FTSE 100 index, suffer their biggest falls since 11 September 2001.
The US Fed cuts rates by three quarters of a percentage point to 3.5% – its biggest cut in 25 years – to try and prevent the economy from slumping into recession.
It is the first emergency cut in rates since 2001. Stock markets around the world recover the previous day’s heavy losses.
A major bond insurer MBIA, announces a loss of $2.3bn – its biggest to date for a three-month period -blaming its exposure to the US sub-prime mortgage crisis.
FEBRUARY – MARCH 2008: BIG NAME CASUALTIES
US Federal Reserve boss Ben Bernanke adds his voice to concerns about monoline insurers, saying he is closely monitoring developments “given the adverse effects that problems of financial guarantors can have on financial markets and the economy”.
The Bank of England cuts interest rates by a quarter of one percent to 5.25%.
Some investors forgot the golden rule of financing: ‘Don’t buy things that you don’t understand’
FSA chief executive Hector Sants, speaking on 27 February
In the UK, the latest CML figures show the number of homes repossessed in the UK rose to 27,100 in 2007, its highest level since 1999.
Leaders from the G7 group of industrialised nations say worldwide losses stemming from the collapse of the US sub-prime mortgage market could reach $400bn.
After considering a number of private sector rescue proposals, including from Richard Branson’s Virgin Group, the government announces that struggling Northern Rock is to be nationalised for a temporary period.
In its biggest intervention yet, the Federal Reserve makes $200bn of funds available to banks and other institutions to try to improve liquidity in the markets.
Wall Street’s fifth-largest bank, Bear Stearns, is acquired by larger rival JP Morgan Chase for $240m in a deal backed by $30bn of central bank loans.
A year earlier, Bear Stearns had been worth £18bn.
Nationwide predicts UK house prices will fall by the end of the year, revising its previous forecast of no change in prices.
APRIL 2008: THE 100% MORTGAGE IS CONSIGNED TO HISTORY
Moneyfacts, which monitors financial products, says 20% of mortgage products have been withdrawn from the UK market in the previous seven days.
I have a deep sense of shock at how deeply our successful industry has already been hit by these unprecedented funding market conditions
Steven Crawshaw, chairman of the Council for Mortgage Lenders, speaking on 11 April 2008
Five days later the 100% mortgage disappears when Abbey withdraws the last home loan available without a deposit.
The International Monetary Fund (IMF), which oversees the global economy, warns that potential losses from the credit crunch could reach $1 trillion and may be even higher.
It says 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 cuts interest rates by a quarter of one percent to 5%.
A warning is issued by the CML that the amount of funding available for mortgages in the UK could be cut in half this year.
It calls on the Bank of England to kick-start the money markets and ease the effects of the credit crunch.
The effects of the credit crunch are likely to be broader, deeper and more protracted than previously expected
IMF global stability report, 8 April 2008
Confidence in the UK housing market falls to its lowest point in 30 years in March, according to the Royal Institution of Chartered Surveyors, because of the “unique liquidity blight”.
But it does add that the situation is good news for buyers with large deposits who can buy property that was previously out of reach.
The Bank of England announces details of an ambitious £50bn plan designed to help credit-squeezed banks by allowing them to swap potentially risky mortgage debts for secure government bonds.
APRIL – JUNE 2008: BANKS PASS ROUND THE HAT
Royal Bank of Scotland announces a plan to raise money from its shareholders with a £12bn rights issue – the biggest in UK corporate history.
The firm also announces a write-down of £5.9bn on the value of its investments between April and June – the largest write-off yet for a British bank.
Persimmon becomes the first UK house builder to announce major cutbacks, citing the lack of affordable mortgages and a fall in consumer confidence.
It adds sales have fallen by a quarter since the beginning of the year.
Because of the uncertainties in the global economy and the UK lending environment, it is difficult to predict when the [housing] market will improve
House builder Persimmon
Read the full story from 25 April
The CML says number of new mortgages approved in March slipped 44% to 64, the lowest monthly number since records began in 1999.
The first annual fall in house prices for 12 years is recorded by Nationwide.
Prices were 1% lower in April compared to a year earlier after a “steep decline” in home buying over the previous six months.
Later in the week, figures from the UK’s biggest lender Halifax, show a 0.9% annual fall for April.
More than 850 companies went into administration between January and March, government figures show, a rise of 54% on the previous year. Retail and construction firms are hardest hit.
Swiss bank UBS, one of the worst affected by the credit crunch, launches a $15.5bn rights issue to cover some of the $37bn it lost on assets linked to US mortgage debt.
There are significant developments in two major credit crunch-related investigations in the US, which it is hoped will restore confidence in the credit markets.
The FBI arrests 406 people, including brokers and housing developers, as part of a crackdown on alleged mortgage frauds worth $1bn.
Separately, two former Bear Stearns workers face criminal charges related to the collapse of two hedge funds linked to sub-prime mortgages.
It is alleged they knew of the funds’ problems but did not disclose them to investors, who lost a total of $1.4bn.
Barclays announces plans to raise £4.5bn in a share issue to bolster its balance sheet.
The Qatar Investment Authority, the state-owned investment arm of the Gulf state, will invest £1.7bn in the British bank, giving it a 7.7% share in the business. A number of other foreign investors increase their existing holdings.
JULY 2008: MAJOR LENDERS ON THE EDGE
The gloomy findings of a survey of its members prompt the British Chambers of Commerce (BCC) to suggest that the UK is facing a serious risk of recession within months.
Meanwhile, the FTSE 100 stock index briefly dips into a “bear market”, in which the market suffers a 20% fall from its recent highs.
The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected
British Chambers of Commerce, 18 July 2008
Read the full story
US mortgage lender IndyMac collapses – the second-biggest bank in US history to fail.
Financial authorities step in to assist America’s two largest lenders, Fannie Mae and Freddie Mac. As owners or guarantors of $5 trillion worth of home loans, they are crucial to the US housing market and authorities agree they could not be allowed to fail.
The previous week, there had been a panic amongst investors that they might collapse, causing their share prices to plummet.
Just 8% of HBOS investors agree to take up the new shares offered in its £4bn rights issue, because they are priced higher than existing shares are trading on the stock market.
But HBOS still gets the £4bn it wanted, as the unsold new shares are bought by the issue’s underwriters.
UK house prices show their biggest annual fall since the Nationwide began its housing survey in 1991, a decline of 8.1%.
The average home now costs £169,316. That is nearly £15,000 cheaper than in the same month last year.
Meanwhile, HBOS reveals that profits for the first half of the year sank 72% to £848m, while bad debts rose 36% to £1.31bn as customers failed to repay loans.
AUGUST – SEPTEMBER 2008: GIANTS SUFFER
Global banking giant HSBC warned that conditions in financial markets are at their toughest “for several decades” after suffering a 28% fall in half-year profits.
Of Europe’s top banks, HSBC has among the heaviest exposure to the troubled US housing and credit markets.
The bad news continues with revised figures from the ONS revealing that the UK economy is a standstill.
Nationwide reveals that UK house prices have fallen by 10.5% in a year.
A day later Bradford and Bingley posts losses of £26.7m for the first half of 2008, blaming surging mortgage arrears for a rise in impairment.
Looking ahead, it warned it expected arrears to remain at high levels for the rest of the year.
Chancellor Alistair Darling warns that the economy is facing its worst crisis for 60 years in an interview with the Guardian newspaper, saying the current downturn would be more “profound and long-lasting” than most had feared.
Official figures from the Bank of England show a slump in approved mortgages for July.
Meanwhile, while the pound falls to record lows of 81.21 pence against the euro and two-year lows of $1.80.
In an effort to kick-start the UK housing market the Treasury announces a one year rise in stamp duty exemption, from £125,000 to £175,000.
But there is more bad news, as the Organisation for Economic Cooperation and Development forecasts that the UK will be in a full blown recession by the end of the next two quarters. A day later the European central bank cuts growth forecast 2009 to 1.2% from 1.5%.
The Bank of England leaves rates on hold at 5% while the latest figures from the Halifax show that house prices in England and Wales continue to fall.
A raft of negative news from around the world sees the FTSE notch up its steepest weekly decline since July 2002.
The US labour market figures – which showed the unemployment rate rising to 6.1% – were a further jolt to investors who have had to swallow a slew of poor economic data in recent days.
The Halifax warns that the impact of the credit crunch will be felt well into 2010. Chief executive Andy Hornby explains that British banks will continue to suffer major problems in offering loans until they can raise significant sums on wholesale markets, something that will not be possible until US house prices recover.
Mortgage lenders Fannie Mae and Freddie Mac – which account for nearly half of the outstanding mortgages in the US – are rescued by the US government in one of the largest bailouts in US history.
Treasury Secretary Henry Paulson says the two firms’ debt levels posed a “systemic risk” to financial stability and that, without action, the situation would get worse.
At the same time, in the UK, the Nationwide announces it will merge with two smaller rivals, the Derbyshire and Cheshire Building Societies.
More bad news emerges for the UK economy as the ONS reveals manufacturing output fell by 0.2% between June and July, raising a real fear of recession.
Meanwhile, the British Retail Consortium reports UK retail sales values fell by 1.0% on a like-for-like basis from August 2007.
On the housing front, there were more negative headlines with the Royal Institute of Chartered Surveyors published figures showing house sales were at their lowest level for 30 years, while the CML reported that the number of first-time buyers has hit its lowest level since its survey began in January 2002.
Wall Street bank Lehman Brothers posts a loss of $3.9bn (£2.2bn) for the three months to August.
The announcement comes against a background of further dire economic warnings from the European Commission, which warned that the UK, Germany and Spain will go into recession by the end of the year.
After days of searching frantically for a buyer, Lehman Brothers files for Chapter 11 bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis.
Former Federal Reserve chief Alan Greenspan dubs failure as “probably a once in a century type of event” and warns that other major firms will also go bust.
Meanwhile fellow US bank Merrill Lynch, also stung by the credit crunch, agreed to be taken over by Bank of America for $50bn, the latest twist in a dramatic turn of events on Wall Street.
Sourced from – http://news.bbc.co.uk/2/hi/business/7521250.stm