Two years that shook the world.

What_Goes_Up · August 10, 2009, 12:37am

independent.co.uk/news/busin … 69393.html

**Two years that shook the world **
Sunday, 9 August 2009

The global economy changed irrevocably on 9 August, 2007. Richard Northedge looks at the legacy of the past tumultuous 24 months

Today is the second birthday of the credit crunch – and the second year has been even more troubled than the first. On 9 August last year, HBOS was still independent and Bradford & Bingley’s mortgages remained unnationalised.

Lehman Brothers had yet to collapse and the US government had not taken control of mortgage groups Fannie Mae and Freddie Mac. The IMF had not bailed out Iceland. Sir Fred Goodwin still headed Royal Bank of Scotland. Bank of England interest rates were 5 per cent rather than today’s 0.5 per cent. Quantitative easing was an unknown phrase.

“This last year has been particularly difficult for our industry,” admits Eric Daniels, chief executive of Lloyds Banking Group, for whom the prospect of the HBOS merger was only a dream on the crunch’s first anniversary. Last week the deal became a nightmare when he revealed £13bn of bad debts.

The credit crunch started on 9 August 2007 when French bank BNP Paribas suspended three funds facing losses on US sub-prime mortgage lending. That caused banks to stop lending to each other, interest rates to soar, and provoked the funding crisis at Northern Rock which resulted in the run on its funds. The Rock’s former chief executive, Adam Applegarth, famously conceded: “Life changed on 9 August. That was when the markets froze.” But on the first anniversary of the crunch, Northern Rock remained its only substantial victim – nationalised with a policy to run down its operations. Central banks had provided liquidity to lenders in Britain, Europe and the US while Bear Stearns was rescued by JP Morgan; HBOS, Bradford & Bingley and RBS had raised capital through rights issues – but banks and regulators still believed sticking plaster rather than surgery was the solution.

There was hope at last year’s anniversary that the worst was over. Not so. The UK high street banks raised £20bn of new equity in the first year of the crunch; in the second they have had to find almost £70bn, including the £1bn placing last week by Standard Chartered. When existing investors couldn’t stump up more capital, the Government acted as underwriter and became the sector’s biggest investor.

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