How the 2007-2008 crisis unfolded : A brief history
EXACTLY TEN YEARS ago, on May 6th 2007, ABN AMRO rejected a $24.5bn bid by three European rivals for LaSalle, a Chicago bank which the Dutch lender had owned since 1979. The previous month Britain’s Royal Bank of Scotland (RBS), Spain’s Santander and Belgium’s Fortis had offered €72.2bn (then $98bn), almost all in cash, for the whole of ABN AMRO. By October that year RBS and its partners had won their prize, minus LaSalle, in what is still banking’s biggest takeover.
When ABN AMRO was carved up, RBS briefly enjoyed the glory of being the world’s largest bank by assets.
A giddy party was in full swing. “As long as the music is playing,” Chuck Prince, then boss of Citigroup, told the Financial Times in a quip that became notorious, “you’ve got to get up and dance.” But the tunes were already off-key. American house prices, driven skyward by low interest rates and rash lending to “subprime” borrowers (people with poor or non-existent credit histories) had peaked a year earlier. In February 2007 Britain’s HSBC shocked markets by raising its bad-debt provisions to $10.5bn, $1.8bn more than analysts had expected, because of failing American subprime mortgages. During that summer two hedge funds run by Bear Stearns, an investment bank, collapsed after losing money on soured subprime investments.
As banks started to worry about exposure to subprime lending and the piles of complicated derivatives connected to it, credit markets began to seize up, causing BNP Paribas, a French bank, to suspend withdrawals from three funds in August. The following month Northern Rock, a British mortgage lender that had funded its rapid expansion in the flighty wholesale markets, asked the Bank of England for liquidity support. Depositors queued round the block to retrieve their money. In November 2007 the music stopped even for Mr Prince: he resigned. That quarter Citi took subprime-related write-downs of $18.1bn.
The euphoric frenzy came to a total halt with Lehman Brothers’ implosion in September 2008. The mergers of that period, unlike the opulent, record-breaking deal of 2007, were hasty, embarrassed dashes to the altar. JPMorgan Chase saved Bear Stearns in March 2008 when Bear’s failure became inevitable. After Lehman’s collapse, JPMorgan took over Washington Mutual, which had become America’s seventh-biggest bank on the back of the housing boom. Bank of America absorbed Countrywide, another over-eager housing lender, and then Merrill Lynch. Japan’s MUFG bought 20% of Morgan Stanley. Wells Fargo snapped up Wachovia, America’s fourth-biggest bank.
After its moment in the sun, RBS would have followed Lehman into oblivion but for a £45bn ($78bn) bail-out from the British government. Today, after nine years of losses, it remains in state ownership. Fortis was rescued by the governments of Belgium, Luxembourg and the Netherlands and dismembered. Santander played its hand far better. It emerged from the crisis without a single quarter of losses, and remains the euro zone’s most valuable bank.
Source: economist.com