WASHINGTON, D.C.: Banks floundered, grabbed government lifelines, and failed in 2008 as the global financial crisis shredded their own vaunted reputations for security.
After an “annus horribilis” that many would sooner forget, banks are set to enter 2009 damaged and more dependent on governments that have taken unprecedented steps to prop up the imploding financial system.
That reliance on public money—often in exchange for equity stakes and sometimes as full nationalizations—is sounding alarms over what some have called a new wave of socialism that threatens the nature of freewheeling US-style capitalism.
As a practical matter, the bailouts are no guarantee of success despite hundreds of billions of dollars injected into the financial system.
Officials widely admit they are struggling to contain the worst global financial crisis since the 1930s Great Depression.
The credit-fueled economic boom went bust last year amid rising defaults on US home loans as a housing bubble burst.
Banks have been on the frontlines of the credit squeeze that stemmed from the US subprime mortgage delinquencies and then spread around the globe.
A rash of central bank interest rate cuts had little effect on frozen credit and governments increasingly turned to fiscal measures, like the US $168-billion stimulus package in February, to try to stimulate stalling economies.
Banks that had snapped up billions of dollars in mortgage-related and other high-risk assets have been forced to write off nearly a trillion dollars in losses since the crunch began in August 2007.
US banks lost $669.8 billion and European banks $287.8 billion, dwarfing Asian losses of $30.5 billion.
The landscape of US banking, the epicenter of the crisis, has been turned upside-down, analysts say.
“We’re going into the process of integrating businesses into other businesses—the financial sector completely reshaping itself for a future that is still uncertain,” analyst Gina Martin of Wachovia Securities told Agence France-Presse.
The US banking sector capitulated into the hands of government within the course of months as one big bank after another tumbled.
The first domino to fall was Bear Stearns, the smallest of the major Wall Street investment banks.
In what began a litany of the US government’s “too big to fail” mantra, the Federal Reserve orchestrated the ailing Bear’s sale to rival JPMorgan Chase in March.
After a few months’ lull, the crisis beast roared back to life more ferocious than ever in a September double-whammy nightmare on Wall Street.
Lehman Brothers, the fifth-largest investment bank that could find neither buyer nor government bailout, filed for bankruptcy protection on September 15, shocking markets worldwide.
On the same day, troubled peer Merrill Lynch, whose iconic bull statue graces Wall Street, escaped the same fate by agreeing to be bought by Bank of America.
Goldman Sachs and Morgan Stanley, the two Street symbols left standing, morphed into banks on September 21 to benefit from government support.
Treasury Secretary Henry Paulson, trying to stem the bloodletting, finally won congressional approval of a massive $700-billion financial bailout on October 3.
Across the pond, Europe was being dragged into the chaos.
British mortgage giant Northern Rock had to be nationalized in February.
Belgian-Dutch bank Fortis was saved by public funds on September 28, then chopped up and sold to BNP Paribas and ABN Amro. The next day Bradford & Bingley was nationalized and two days later, Dexia was saved by Belgium, France and Luxembourg.
British Prime Minister Gordon Brown’s plan of using bank bailouts to avert financial Armageddon swiftly won followers around the world.
US Treasury Chief Paulson switched tack on the $700-billion Troubled Asset Relief Program approved to buy up toxic mortgage-related assets, and instead started pouring capital into banks.
The list of troubled banks swallowed up in takeovers was long and included Merrill Lynch (Bank of America) and Wachovia (Wells Fargo) in the US. In Europe, the list included Dresdner swallowed by Commerzbank, HBOS (Lloyds TSB) and Alliance & Leicester (Santander).
By the end of 2008, the lack of credit had strangled the major economies—sending the United States, Canada, the eurozone and others into recession—and was sharply slowing growth in developing countries.
“At the moment the pressure is still on,” said Hung Tran, head of the capital markets department at the Institute of International Finance, an association of global financial firms based in Washington, told Agence France-Presse.
“What the crisis has shown is this level of leveraging is unsustainable.”
Critics say there is a risk of too much government intervention that will kill the capitalist goose and its golden egg.
“This is the path the United States is heading towards as the recession takes its toll and government reaches further and further into the private sector to stabilize the economy,” said Andrew Busch BMO Capital Markets.
“Initially, the moves are welcomed as workers are looked after, jobs are created and big business vilified. However, the government forcing banks to make loans to companies that can’t make the payments perpetuates the weak credit problem and keeps the cycle going.” — AFP