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

[All the News That Doesn't Fit]

sent by Riaz K Tayob - activ-l

The Guardian - Dec 31, 2007
http://www.guardian.co.uk


Review of the year

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

Mighty institutions and powerful figures undermined 
by pitiful little property deals

by David Teather

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.

In numbers

$99.29  - The oil price reaches its peak just short of $100 a barrel
(November 21)

$2 - The pound hits $2 for the first time since 1992 (April 16)

#1.1bn - Price HSBC receives selling its headquarters in Canary Wharf
(April 30)

$100bn - Ben Bernanke's estimate of total sub-prime losses (July 19)