The August round of the financial crisis started when it emerged US giant mortgage lender Countrywide might go bust. Angelo Mozilo, boss at the mortgage lenders, said America is at the mercy of “destructive housing deflation.”
On August 15 the FTSE 100 suffered its biggest one day fall since 2003. But, there was more to the crisis than the woes at Countrywide.
Data emerged to tell how US constructions starts were at their lowest level for ten years.
Wal-Mart added to the misery when its boss H Lee Scott said “Many customers are running out of money towards the end of the month.”
Private equity giant KKR postponed its $1.25 billion IPO, and speculation suggested it was having trouble rustling up the readies to fund its $45 billion of Texas energy company TXU and in the UK, the £11bn purchase of Boots.
Private Equities’ interest in Virgin media appeared to be off, NASDAQ even gave up on its hope of buying the London Stock Exchange, while Solent’s $4.3bn MainSail II fund and Avendis’s $5bn Golden Key Fund were forced to sell assets because they could not raise short-term financing.
Banks panicked. They fretted that other banks and hedge funds had taken on too much debt via these mysterious CDOs (Collateralised Debt Obligations), in which debts including sub prime, from credit cards and corporate financing can be clubbed together under one bond and then syndicated across many lenders.
Writing in the Sunday Times, Ian Rushbrook of Personal Assets Trust said “We have a huge credit bubble#133;if the US banking system sustains actual losses of around $100 bn as some estimates suggest then the implications are enormous. Banks globally will have to reduce their lending by up to $1,200bn, causing a debt crunch.” He predicted that the FTSE 100 would fall to 4,500 - down 25 per cent.
Then, the central banks stepped in. Fed chairman Ben Bernanke once said the answer to liquidity problems is to jump into a helicopter and shower the country with cash - and in a way that’s what helicopter Ben and the European Central Bank (ECB) did.
The Fed soothed nerves when it said “The Fed is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in the financial markets.” At the ECB, President Jean-Claude Trichet said “I call on all parties concerned to keep their composure” and said the bank will help “consolidate a smooth return to normal assessment of risks in liquid markets.”
And with that, the two central banks pumped in money. Over $150bn worth of short term financing was made available. That helped.
US Fed policy maker William Poole said “only a calamity” would justify a snap cut in interest rates. And yet that was what the Fed did. At least, it lowered the discount rate. That helped some more.
It was enough. Markets picked up, although not everyone was pleased. Carl Weinberg of High Frequency Economics said, “I am nervous. I am worried the Fed knows something we don’t.”
As of this morning, the Dow Jones stood at 13322. That’s 678 points down on the year high, set in mid July, but 859 points up on the start of year position, and 1271 points up on the year low.
The FTSE 100 stands at 6220: 709 points down on the year high, and just 0.1 points up on the year start.
It’s funny isn’t it? This is fundamentally a crisis that is “Made in America” and yet this year, the FTSE 100 has performed much worse.
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