The 2007 - 2008 financial crisis was one of the more serious credit crunches faced by the world, and the full impact may yet be realised until late 2009. Origins of the 2007/2008 credit crunch The credit crunch is thought to stem from a huge and unstable sub-prime mortgage market in America.
American mortgage lenders approved high-risk mortgage loans to people with poor credit records. These debts were packed together into CDO’s (Collateralised Debt Obligations) and sold internationally.
This problem started with problems in the US housing market. Interest rates increased from 1 per cent to 5.35 per cent between 2004-2006, and borrowers began to get into trouble with their mortgage loans.
American mortgage lenders began to feel the pressure, and the US sub-prime mortgage crisis becomes common knowledge.
August 2007
Early indications of credit restrictions begin to appear in America, as banks refuse to do business with each others. The US Federal Reserve tries to intervene and issue an economic growth warning.
UK sub-prime mortgage lenders respond by withdrawing mortgages and putting up the cost of borrowing for sub-prime customers.
September 2007 The Libor rate, at which banks lend to each other, increases to 6.7975 per cent, meaning that banks are finding it hard to lend to each other. The Bank of England base interest rate stands at 5.75 per cent. Northern Rock asks for urgent financial assistance from the Bank of England to prevent a collapse, and the credit crunch becomes apparent to UK consumers.
Northern Rock, unable to fund their mortgage lending, are in a dangerous position, and depositors withdraw £1 billion in savings. The Bank of England auctions £10 billion to inject some liquidity into the market. October 2007 UBS announce massive credit crunch losses of $3.4 billion due to sub-prime problems. Citigroup and Merrill Lynch announce huge exposures to bad debts. House prices, previously climbing month on month, begin to stabilise.
November 2007
The mortgage market begins to be affected by the credit crunch, and the number of mortgage approvals slumps to a three year low. In late November the Council of Mortgage Lenders make it clear that the credit crunch is seriously affecting the mortgage market.
December 2007
The Bank of England drops interest rates to 5.5 per cent. American intervention temporarily lowers the inter-bank lending rate by flooding the market with billions of dollars in loans. More funding is made available, both by the US Federal Reserve and the European Central Bank.
January 2008
Global stock market experience severe crashes, the largest since September 11th 2001. To avoid a recession, America cuts interest rates by three quarters of a percentage point, the largest cut in 25 years. Bond insurance companies experience serious losses.
February 2008
The Bank of England cuts interest rates by 0.25 per cent. Home repossessions in the UK soar, and the mortgage market is severely restricted. G7 leaders estimate some $400 billion fallout from the sub-prime collapse. Northern Rock is nationalised temporarily.
March 2008
The Federal Reserve offer up $200 billion of funds to banks and financial services institutions to try and increase liquidity. US investment bank Bear Stearns collapses and is acquired by JP Morgan Chase. Early indications that UK house prices will fall become apparent.
April 2008
The mortgage market shrinks considerably, and 100 per cent mortgage loans disappear from the mortgage market.
Credit crunch losses are estimated at $1 trillion by the International Monetary Fund. Other sectors begin to be affected by the credit crunch. The Bank of England cuts interest rates to 5 per cent. Consumer confidence in the housing market slumps, although borrowers with large deposits can still get a bargain.
The Bank of England gives details of a £50 billion rescue package allowing banks to swap mortgage debt for government bonds. Royal Bank of Scotland call a £12 billion rights issue.
UK homebuilders see major cutbacks, and blame consumer confidence and a dearth of affordable mortgages. New mortgage approvals fall by 44 per cent, the lowest monthly figures since records started. House prices begin to fall.
May-June 2008
Huge volumes of companies go into administration with the credit crunch the principal cause. UBS launch a huge rights issue following massive losses. Barclays plan a share issue from foreign investors.
July 2008
Experts predict that the UK is facing a recession as a result of the credit crunch. The outlook is grim and the recovery period is expected to be extensive. The US mortgage lender Indy Mac collapses, and it becomes that Fannie Mae and Freddie Mac, the two giant American mortgage lenders are in trouble. US authorities step in to help the companies, which cannot be allowed to fail.
House prices in the UK slump by 8.1 per cent, with the average house now costing £163,316. HBOS revealed massive slumps.
August 2008
Major Banks such as HSBC recorded falling profits. UK house price falls exceed 10 per cent in a year. Bradford & Bingley reveal massive losses due to the credit crunch. Alistair Darling points out that the economy has hit its worst crisis for the last 60 years, with a profound and long-lasting downturn expected. The pound falls to record lows, as does mortgage lending.
September 2008
The treasury announce a bid to reinvigorate the housing market by exempting stamp duty for one year for houses worth £175,000 or less.
The UK is predicted to fall into recession by the Organisation for Economic Cooperation and Development forecasts. The FTSE experiences its steepest weekly slide since July 2002. Halifax predicts the credit crunch will last until 2010, with banks continuing to suffer. In America, Fannie Mae and Freddie Mac are rescued by the US Government.
Nationwide merges with smaller lenders, Derbyshire and Cheshire Building Societies. House sales, according to Royal Institute of Chartered Surveyors, hit record lows. First time buyers also hit record lows. Lehman Brothers posts massive losses, and files for chapter 11 bankruptcy a few days later. Merrill Lynch is taken over by the Bank of America for $50 billion.
The largest insurance company in America, AIG, is given a $85 billion rescue package to prevent bankruptcy. In the UK, HBOS and Lloyds TSB merge, creating banking giant with a one-third mortgage and savings market share. Washington Mutual is closed down and sold to JP Morgan Chase. Fortis in Europe is partly nationalised to ensure its survival. Rescue packages are launched in Britain and America. Bradford & Bingley is nationalised. The economy of Iceland faces tough times. Wachovia is bought by Citigroup.
October 2008
Attempts to stabilise the market, with a $700 billion financial rescue bill passed in America. HBOS shares climb 20 per cent following consumer confidence increases.
The Financial Services Authority raises saving guarantees from £35,000 to £50,000. Germany plans a 50 billion euro rescue plan to save their banks. The Icelandic government takes control of the second largest bank in the country, Landsbanki, owner of Icesave.
The UK government announce a combined £500 billion rescue package. Governments across the world cut interest rates amid widening fears of a global recession. The UK plan to nationalise Royal Bank of Scotland, HBOS and Lloyds TSB.
Unemployment figures in the UK soar. The effects of the rescue package remain to be seen.