Nov 13, 2009
The Financial Crisis Hits Home
In March 2007, as the crisis was beginning to break, the value of US subprime mortgages was approximately $1.3 trillion, with over 7.5 million mortgages outstanding. These high risk sub-prime loans were bundled together with other home loans and converted into paper ‘asset-backed securities’ that were traded on the international financial markets; traders often earning millions of dollars in bonuses for trading them at a profit.
The problem was thatwithin these bundled-up asset-backed securities, nobody knew where the bad ‘toxic’ loans were. By the time it became known that high-risk, sub-prime loans had been bundled up and sold on the international financial markets, defaults by borrowers who could not afford to repay their loans had started to escalate and the value of the homes in the US against which they were secured fell dramatically. Nobody could tell which banks held the toxic asset-backed securities. In compliance with agreed international accounting rules, banks started to write down the value of the asset-backed securities they had invested in leading to huge losses for the banking sector. Banks became unwilling to lend to each other, because nobody knew where the risks to liquidity of the banks lay and the shockwaves of the crisis spread around the globe.
In April 2007, nine banks occupied places in the FTSE 100 all share index. Of these, five are now substantially or wholly in public ownership. None of the four demutualised building societies, Alliance and Leicester, Bradford and Bingley, HBOS or Northern Rock still exist as a stand-alone bank.
This has had a tremendous impact on the rest of the UK economy. The massive contraction of credit has had a hugely damaging effect on other businesses – an effect that we are still yet to see in full. It is hard to estimate what the eventual costs of the financial crisis will be on public funds, but it is likely that these will be significant and long term. Over the last year 750,000 jobs have been lost. The failure of our banking sector will come at a serious cost to everyone in the UK; whose savings have been risked, whose taxes will have to rise and whose livelihoods are threatened by the recession that has followed.
The problem was thatwithin these bundled-up asset-backed securities, nobody knew where the bad ‘toxic’ loans were. By the time it became known that high-risk, sub-prime loans had been bundled up and sold on the international financial markets, defaults by borrowers who could not afford to repay their loans had started to escalate and the value of the homes in the US against which they were secured fell dramatically. Nobody could tell which banks held the toxic asset-backed securities. In compliance with agreed international accounting rules, banks started to write down the value of the asset-backed securities they had invested in leading to huge losses for the banking sector. Banks became unwilling to lend to each other, because nobody knew where the risks to liquidity of the banks lay and the shockwaves of the crisis spread around the globe.
In April 2007, nine banks occupied places in the FTSE 100 all share index. Of these, five are now substantially or wholly in public ownership. None of the four demutualised building societies, Alliance and Leicester, Bradford and Bingley, HBOS or Northern Rock still exist as a stand-alone bank.
This has had a tremendous impact on the rest of the UK economy. The massive contraction of credit has had a hugely damaging effect on other businesses – an effect that we are still yet to see in full. It is hard to estimate what the eventual costs of the financial crisis will be on public funds, but it is likely that these will be significant and long term. Over the last year 750,000 jobs have been lost. The failure of our banking sector will come at a serious cost to everyone in the UK; whose savings have been risked, whose taxes will have to rise and whose livelihoods are threatened by the recession that has followed.
