It is the first major bank to acknowledge the risk of exposure to sub-prime mortgage markets. Adam Applegarth rightNorthern Rock's chief executive, later says that it was "the day the world changed" Larry Elliott, economics editor, said: It marks the cut-off point between 'an Edwardian summer' of prosperity and tranquillity and the trench warfare of the credit crunch — the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit" 14 September British bank Northern Rock has borrowed large sums of money to fund mortgages for customers, and needs to pay off its debt by reselling or "securitising" those mortgages in the international capital markets.
When the Wall Street evangelists started preaching "no bailout for you" before the collapse of British bank Northern Rock, they hardly knew that history would ultimately have the last laugh. With the onset of the global credit crunch and the fall of Northern Rock, August turned out to be just the starting point for significant financial landslides.
Since then, we have seen many big names rise, fall, and fall even more. In this article, we'll recap how the financial crisis of unfolded. Before the Beginning Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times.
Inthe U. Although the economy nicely withstood terrorist attacks, the bust of the dot-com bubble and accounting scandals, the fear of recession really preoccupied everybody's minds. To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6. Cheap moneyonce out of the bottle, always looks to be taken for a ride.
It found easy prey in restless bankers—and even more restless borrowers who had no income, no job, and no assets. These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new ray of hope. More home loans, more home buyers, more appreciation in home prices.
It wasn't long before things started to move just as the cheap money wanted them to. This environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold.
The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. Unfortunately, no one was there to warn about the tummy aches that would follow.
But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to repackage candy loans into collateralized debt obligations CDOs and pass on the debt to another candy shop. Soon a big secondary market for originating and distributing subprime loans developed.
MS - which freed them to leverage up to times or even times their initial investment. Everybody was on a sugar high, feeling as if the cavities were never going to come. The Beginning of the End But, every good item has a bad side, and several of these factors started to emerge alongside one another.
The trouble started when the interest rates started rising, and home ownership reached a saturation point. From June 30,onward, the Fed started raising rates so much that by Junethe Federal funds rate had reached 5.
Declines Begin There were early signs of distress: Home Construction Index during Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates, and they started defaulting on their loans.
This caused to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During February and Marchmore than 25 subprime lenders filed for bankruptcy, which was enough to start the tide.
In April, well-known New Century Financial also filed for bankruptcy. Investments and the Public Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out. But even this large move was only a small affair in comparison to what was to happen in the months ahead.
The Landslide Begins It became apparent in August that the financial market could not solve the subprime crisis on its own and the problems spread beyond the UnitedState's borders.
The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem.The World Bank Group works in every major area of development.
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