The financial panic that never was
http://www.socialistreview.org.uk/article.php?articlenumber=10054
The financial panic that never was
Frontline article by Chris Harman, September 2007
As we go to press the financial panic that made the headlines across the world in August seems to have subsided.
The message now from many of those who panicked is that nothing was or is amiss. After all, they say, the panic was only in the financial sector, not "the real economy". But it was not so simple.
It resulted from old fashioned financial chicanery. Banks, hedge funds and wealthy individuals (you had to invest a minimum of $5 million to take part) set out to make easy profits by providing mortgages at high interest rates to Americans too poor to borrow from the usual sources. As this "subprime mortgage market" boomed, financial interests across the world clamoured to take part, borrowing billions from each other to get a share of the action. There was hardly a respectable bank in the world not involved.
Then a slide in house prices and a slowdown in the US economy suddenly combined to make the poor too poor to keep up with their mortgage repayments. Bankers, hedge funds and rich parasites could not extract from them the money they needed to pay back other bankers, hedge funds and rich parasites.
Two hedge funds connected to a major US bank came close to going bust, as did two state banks in Germany. For a day or two it looked as if the whole process of borrowing and lending which keeps businesses going might grind to a halt, since no financier was certain whether any other had the funds to repay any debts. This was the "credit crunch".
Then on 18 August an emergency meeting of the US Federal Reserve Bank agreed to provide extra support to those in most trouble (those financiers, or course, not the poor mortgage borrowers), and everything suddenly seemed all right.
Except what happened was not some accident. It was a rerun in slightly different conditions of the stock exchange panic of 1987 and the collapse of the hedge fund Long Term Capital Management in 1998.
On those occasions the actions of the US Fed were enough to prevent a more immediate general crisis - only for it to return with a vengeance on both occasions within two and half years. This was because the financial chicanery was a reflection of more fundamental imbalances within the world system which could not be ignored for ever.
The imbalances this time are much more serious than a decade or two ago. The world economy was only able to recover from the recession of 2001-2002 because of US consumers and the US government borrowing massively to spend well beyond their incomes, by a total of around $400 billion a year. But a point was bound to arise when such a balancing act could not work any more.
The fear on 17 August was that this point had already been reached. The action of the US Fed the next day postponed the day of reckoning, but no one knows for how long. Meanwhile, more than a million working class Americans face the loss of their homes this year.
Show us the money
Show us the money
http://www.guardian.co.uk/g2/story/0,,2172072,00.html
The run on the Northern Rock building society is nothing new. As long as there have been banks there have been crises of confidence - and some were truly spectacular, as Jon Henley reports
Wednesday September 19, 2007
The Guardian
Then there was Holland's 1637 tulip bubble, during which a single tulip bulb could briefly fetch six times the average wage or, if you were very lucky, a six-bedroomed piece of prime real estate beside one of Amsterdam's premier canals (one particularly precious speciemen, the Semper Augustus, was apparently once sold for 6,000 Dutch florins at a time when a tonne of butter cost 100). You would have thought, too, that Britain's South Sea Bubble of 1720 might have taught us all a few lessons about exaggerated claims of future returns and fevered, easy-money speculation, but of course no: after losing a terrifying £20,000 on the venture, even Sir Isaac Newton was induced to observe that he could "calculate the movement of the stars, but not the madness of men".
Again, according to Lehman Brothers, the 18th century saw 11 banking and financial crashes and the 19th another 18, including American banking crises in (to keep things brief) 1819, 1837, 1847, 1857, 1873, 1884, 1890 and 1896. There were a healthy 33 such storms in the 20th century, chief among them the Wall Street Crash of 1929 and the Japanese financial turmoil of the 1990s. All, to varying degrees, have caused considerable distress to investors and savers large and small. Stuffing the lot under your mattress may not be such a crazy notion after all.
Victorian banking crisis
By the late 19th century, the City of London and its banks - huge, hierarchical, top-heavy, complacent - seemed all but unassailable. But they were not. In 1866, for example, the bill broker and discount banker Overend, Gurney & Co collapsed with debts of £11m, a breathtaking sum at the time. The company's directors were promptly tried for fraud, but not before they had triggered a financial crisis that saw some 200 other companies, including many smaller banks, go out of business. In 1878, the City of Glasgow Bank also collapsed, its £5.2m "deficiency of capital" reportedly ruining all but 254 of its 1,819 shareholders. These misadventures did, however, have the beneficial effect of prompting our nation's leading financial institutions to behave with a shade more financial responsibility, notably by doing their accounts, underpinned by the establishment of the Bank of England as a lender of last resort.
The panic of 1907
This was a big American crisis during which the stock market lost half its value, the economy fell into recession, banks and trust companies suffered countless and catastrophic runs and the National Bank of North America collapsed. It was sparked, apparently, by a decision by a few New York banks to retract loans but soon spread nationwide and eventually led to the creation of the Federal Reserve System, America's central bank, in 1913. For a number of reasons we do not pretend to understand, it appears that a key player in the crisis was a Mr F Augustus Heinze and his splendidly named Knickerbocker Trust Company, whose dodgy dealings in the financial and commodities markets helped precipitate a stock market crash. The end of the American economy as we know it was, however, averted by one JP Morgan, who sorted the problem out by organising money transfers between the banks, setting up international credit lines, and buying up cheap shares in fundamentally healthy outfits. He did quite well out of it.
The Wall Street crash
The grandaddy of all modern financial disasters began with a frantic flurry of selling (more than 12m shares) on Black Thursday, October 24 1929. Trading slowed somewhat over the next few days, but a sudden slump in share prices gave it second wind, and on October 29, Black Tuesday, the world's foremost capital market crashed, with investors selling a total of 16,410,030 shares, a number not exceeded until 30 years later. Some $14bn was wiped off the value of the New York Stock Exchange in the first day alone, obliging unhappy NYSE clerks to work until 5am the next morning to record all the transactions. By 1933, some 11,000 of America's 25,000 banks had gone bust (although most of the big boys, the Morgans and Rockefellers and Lehmans, survived) and millions of investors were ruined, 11 of them famously jumping from upper-floor windows of Wall Street as the scale of the catastrophe - and of their own losses - became apparent. This was a crash so enormous, so profound, that it marked the end of one era and the start of another; the Roaring Twenties came to a close, the Black Thirties began. Over the next few years, America's jobless total climbed to 13m and millions lost their homes in the Great Depression. Stock prices were still 75% below their 1929 peak as late as April 1942, and it took the market as a whole a quarter of a century to recover.
The Wall Street crash, you may not be surprised to learn, followed a decade-long speculative boom during which millions of investors piled into the stock market and borrowed to buy more. Rising share prices prompted more and more people to invest and more and more banks to lend more and more, creating a classic economic bubble. By the time the end came, brokers would lend you as much as 60% of the face value of the shares you wanted to buy. To those with a little knowledge of economics, this may sound alarmingly familiar. Also familiar may be the fact that the American president of the day declared it would be inappropriate to intervene.
BCCI
Banking collapses don't come much bigger than that of the Bank of Credit and Commerce International, closed down by the Bank of England in July 1991 after regulators found it was up to its neck in such worthy activities as fraud, tax evasion, money laundering, arms trafficking, smuggling, unlawful property dealing, bribery and the support of terrorism. Around a million investors in more than 70 countries, including Crown jeweller's Garrard's, got burned as BCCI, which was founded in Pakistan in 1972 and once claimed assets of $25bn, was shown to have mislaid a cool $13bn. Money from Abu Dhabi, the Bank of America and possibly the CIA went into setting up the bank, which expanded at what can only be called suspicious speed throughout the 1970s, growing from 19 branches and $200m of assets in 1973 to 150 branches and $4bn in 1980.
Despite this apparent success, the financial journalist Dan Atkinson later reckoned that the bank was most probably spending its customers' deposits rather than investing them - in other words, was technically insolvent - as early as 1977. Reports of serious problems, however, did not really start to emerge until the late 1980s, and it was not until March 1991 that the Bank of England commissioned accountants PriceWaterhouse to carry out a full inquiry. This found, with splendidly British understatement, that BCCI had been guilty of "widespread fraud and manipulation". A 1992 US report went further, concluding that BCCI was "not an ordinary bank. It was set up deliberately to avoid centralised regulatory review, and operated extensively in bank secrecy jurisdictions. Its affairs are extraordinarily complex. Its officers were sophisticated international bankers whose apparent objective was to keep their affairs secret, to commit fraud on a massive scale, and to avoid detection."
Creditors claimed that the Bank of England had left "an untamed monster on the loose" for way too long and sued it for £850m; the case eventually collapsed with both sides having racked up legal fees of more than £100m. The collapse of BCCI is widely seen as one of the world's greatest financial scandals. Nor, it has to be said, was it one of the finest chapters in the history of our financial watchdogs.
Barings Bank
BCCI was big; Baring's was old. It was, in fact, the oldest merchant bank in the City until it went spectacularly belly-up in 1995, following losses of some £827m by one of its traders, the now-legendary Nick Leeson, on futures contracts. Baring's was so old (it was founded in 1762) and grand that despite Britain being at war with France, it had helped to finance the Louisiana Purchase, by which the United States bought nearly a quarter of its current territory from the French in 1803. It was also old enough to have been in trouble before, needing to be rescued by the Bank of England in 1890 from a spot of over-exposure to bad Argentine and Uruguayan debt. Neither its illustrious history nor its many high-level connections with, for example, the British royal family could save it, however, when "rogue trader" Leeson let rip in the bank's Singapore offices between 1992 and 1995.
In charge of both the bank's trading operations on the Singapore International Monetary Exchange and of the proper and accurate accounting of those trades, Leeson effectively reported to himself and was therefore able to conceal his shortfalls on the futures market by simply reporting losses as profits. With the help of account number 88888, the hidden so-called "five-eights account", the trader successfully concealed his mounting losses from head office in London until the Kobe earthquake precipitated a slump in Asian financial markets.
A Bank of England bailout failed and Barings was formally declared insolvent on February 26 1995, whereupon it was snapped up by Dutch banking and insurance giant ING - for a quid.
US savings and loans crisis
Savings and loans institutions in the United States were essentially small local banks that made home loans and took deposits from savers. Dating back in many instances to the 1800s, they were comparable in many ways to Britain's building societies. In the 1970s and 80s, however, financial deregulation encouraged S&Ls to venture into far choppier financial waters, offering unfeasibly complex products and lending imprudently large sums in direct competition with the major US commercial banks - but without the banks' expertise, and outside the banks' strict regulatory framework. Predictably, large numbers of them found themselves in deep trouble, and a run began first of all on S&L institutions in Ohio and Maryland in 1985. Some 1,000 of America's 4,000-plus S&L's would eventually go belly-up in what one US economic professor later called "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time". And since the federal government had insured many of the individual deposits in the S&Ls, it found itself facing a mammoth liability when they collapsed: the total cost of the bailout came to $150bn. Another regulatory triumph!
Argentinian banking crisis
On April 19 2002, in a desperate attempt to prevent the collapse of the economy, the Argentine government was forced to order the indefinite closure of all of the country's banks. Falling GDP, high government spending, rampant corruption, endemic tax evasion, rising unemployment and soaring public debt had finally put the wind up savers. They had lost all confidence in the country's economy and begun besieging their banks to withdraw their pesos, convert them into dollars and invest them abroad. In a move that went down very badly with an already unhappy populace, all banking and foreign exchange transactions were halted. This was even tougher than the restriction introduced a few months earlier that had prevented them from withdrawing more than the equivalent of $500 a month of their own money (in fact, being a resourceful people, many Argentinians had managed to obtain court rulings overturning that particular law, successfully taking out more than $100m a day. By the time the full freeze was ordered, experts estimated the Argentine banking system had been bled of more than 10% of its cash). At one stage security staff in the Buenos Aires headquarters of HSBC opened fire on the protesters.
The Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank
In the fine musical Mary Poppins, Mr Dawes, the elderly banker who employs the children's father, optimistically attempts to persuade young Michael to put his money in the bank on the grounds that "If you invest your tuppence/Wisely in the bank/ Safe and sound/ Soon that tuppence/ Will compound." Not only will the lad get a slice of the action in "railways through Africa, dams across the Nile, majestic self- amortising canals and plantations of ripening tea", promises Mr Dawes, but he will "achieve that sense of stature/ as your influence expands/ To the high financial strata/ that established credit now commands". Michael, understandably reluctant to entrust his precious tuppence-worth of pocket money to a baritone banker with full backing orchestra, protests, prompting the other customers in the bank to take fright and frantically begin withdrawing their lives' savings. This in turn forces the Dawes, Tomes, Mousely, Grubbs Fidelity Fiduciary Bank to temporarily suspend trading. The children's unfortunate father, who - perhaps tellingly - is called Mr Banks, faces disciplinary action and is eventually fired for triggering the first run on the bank since 1773. The enduring popularity of this film might be seen as evidence of a popular lack of confidence in the banking system.
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