Financial crisis reaches fifth anniversary

Thanks to the efforts of the global policymakers and financial regulators, the financial crisis has reached its fifth anniversary.

Regular readers know the financial crisis began on August 9, 2007.  However, as a favor to the academic community, I thought it would be useful to quote the Guardian on just why August 9, 2007 is such an important day.

Five years on from what is considered the start of the credit crunch –dubbed "the day the world changed" by the former boss of Northern Rock – ... 

On 9 August 2007, the final wake-up call to the world's banking system occurred after many early warnings over the toxic nature of high-risk mortgage debt. "Sub-prime" was about to enter the vocabulary. 

France's biggest bank, BNP Paribas, had been forced to suspend three of its funds with major exposure to bonds backed by US sub-prime mortgages – it was unable to value them because the market for these products, or "securities", had dried up completely. 

Default levels among high-risk US borrowers had soared as the US Federal Reserve hiked interest rates to 5.25%. 

This shattered confidence in the bonds, which were used by most banks as collateral for the commercial paper they used as a source of short-term funding. 

There had been early signs of the crisis – notably the first-ever profit warning from HSBC in February and the collapse of two Bear Stearns hedge funds exposed to high-risk mortgage debts in July. 

But BNP caused other banks, concerned at the possibility of more bad debts coming out of the woodwork, to cut back on everyday lending to each other by hiking their own interbank rates – and so began the credit crunch....

In the wake of 9 August 2007, heightened inter-bank lending rates, along with the closure of the mortgage securities market, placed the finances of Northern Rock under intolerable pressure. 

The way the group financed itself, "a reckless business model excessively reliant on wholesale funding", according to MPs, had been caught short by the credit crunch. Panicking customers queued to grab back their savings and the UK's first bank run in 140 years was under way. 

The Rock – the fast-growing banking success story of the previous decade – was on the road to nationalisation, a £27bn taxpayer bailout and huge political embarrassment for the government.