Protiviti Financial Crisis FAQ Series: Part 4

Part 4: Did We See It Coming?

March 30, 2009 (SmartPros) -- Signs of the problem appeared as early as late 2006 but didn't begin to snowball until the first half of 2007. In the fourth part of our Protiviti FAQ series on the global financial crisis we present a calendar of events and early indicators.

Part 4: Did We See It Coming?

When were the first signs of the current crisis apparent?
While there were signs of the problems to come toward the end of 2006, the real magnitude of the problem began to surface in the first half of 2007, with such events as the bankruptcy filing of New Century in April 2007 and Bear Stearns’ June 2007 US$3.2 billion rescue of two of its hedge funds that were invested in subprime. Many would say that “crisis level” was reached in August-September 2007, when the money market sector that is critically important to banking and financial operations temporarily froze and the Federal Reserve Bank and European Central Bank added US$100 billion in liquidity into the system, which calmed the market for a short period.

How has the crisis unfolded since Fall 2007?
Even when the crisis began to unfold, few would have predicted the events that have occurred to date in the financial markets. The following timeline highlights some of the major developments and also illustrates the global impact of the crisis:

September 2007
British bank Northern Rock is besieged by worried depositors as its wholesale funding sources dry up; the British government and Bank of England guarantee the deposits; Northern Rock is subsequently nationalized.

The U.S. Federal Reserve starts a series of interest rate drops to ease the impact of the housing slump and mortgage crisis.

October 2007
Profits at U.S. financial giant Citigroup drop sharply. The International Monetary Fund (IMF) lowers its 2008 growth forecast for the European region to 2.1 percent from 2.5 percent, in part because of spillover from the U.S. subprime mortgage crisis and credit market crunch.

December 2007
U.S. President Bush unveils a plan to help up to 1.2 million homeowners pay their loans.

World central banks agree to inject at least US$100 billion into the interbank markets.

January 2008
Swiss banking giant UBS reports more than US$18 billion in writedowns due to exposure to the U.S. real estate market.

Citibank writes down US$18 billion; Merrill Lynch sells a US$6.6 billion stake to foreign investors, including the Korean and Kuwaiti governments.

In the United States, Bank of America acquires Countrywide Financial, the country’s biggest mortgage lender. The Federal Reserve slashes the interest rate by three-quarters of a percentage point to 3.5 percent following a sell-off on global markets. Another cut at month’s end lowers it to 3 percent.

February 2008
Fannie Mae, the largest source of money for U.S. home loans, reports a US$3.55 billion loss for the fourth quarter of 2007, three times what had been expected.

March 2008
On the verge of collapse and under pressure by the Federal Reserve, Bear Stearns is forced to accept a buyout by JPMorgan Chase. The deal is backed by Federal Reserve loans of US$30 billion.

In Germany, Deutsche Bank reports a loss of €141 million for the first quarter of 2008, its first quarterly loss in five years.

The Federal Reserve spearheads a coordinated push by world central banks to bolster global economic confidence by announcing moves to add US$200 billion into markets.

Carlyle Capital falls victim to the U.S. credit crisis as it defaults on US$16.6 billion of indebtedness.

The United States frees up another US$200 billion to back troubled Fannie Mae and Freddie Mac.

April 2008
The IMF projects US$945 billion in losses from the financial crisis. The G7 ministers agree to a new wave of financial regulation to combat the protracted financial crisis.

Deutsche Bank reports a US$4 billion writedown.

Citigroup, Merrill Lynch and Washington Mutual, among others, sell shares to boost capital.

June 2008
Home repossessions more than double as the U.S. housing crisis deepens.

S&P cuts ratings of Morgan Stanley, Merrill Lynch and Lehman Brothers.

July 2008
California mortgage lender IndyMac collapses. Troubles for Fannie Mae and Freddie Mac continue to grow, and the U.S. Treasury and Federal Reserve move to guarantee the debts of Fannie Mae and Freddie Mac.

The U.S. Congress gives final passage to a multibillion-dollar program to address the mortgage and foreclosure crisis.

Spain’s largest property developer, Martinsa-Fadesa, declares insolvency.

Beginning in September 2008, the financial landscape began to change so quickly, with so many economies and companies impacted, that the events described below for September through the current period do not begin to convey all that has transpired.

September 2008
The U.S. government seizes control of Fannie Mae and Freddie Mac in a US$200 billion bailout.

Lehman Brothers investment bank declares US$600 billion bankruptcy. The bulk of its U.S. business (without “toxic” assets) is bought by Barclays Bank. Its U.K. business is put into administration.

Merrill Lynch is acquired by Bank of America.

The United States bails out insurance giant AIG for US$85 billion. (In October, the Federal Reserve extended AIG another US$38 billion in additional credit.)

The last two standing major U.S. investment banks, Morgan Stanley and Goldman Sachs, convert to bank holding companies.
U.S. regulators seize Washington Mutual in the largest-ever U.S. bank failure. JPMorgan Chase acquires the assets, assumes the qualified financial contracts and makes a payment of US$1.9 billion. Claims by equity, subordinated and senior debt holders are not acquired.

The British government intervenes to save major mortgage lender Bradford & Bingley.

The Netherlands, Belgium and Luxembourg announce the takeover of substantial parts of Belgian-Dutch banking and insurance company Fortis. The State of the Netherlands subsequently nationalizes Fortis Bank Nederland, Fortis Insurance Netherlands, Fortis Corporate Insurance and the Fortis share in ABN AMRO Holding.

The German Finance Ministry announces that the government and top banks are moving to inject billions of euros into troubled mortgage lender Hypo Real Estate.

The Icelandic government and Glitnir Bank announce a state takeover of a 75 percent stake in Glitnir. The government subsequently seizes Landsbank and Kaupthing Bank, the country's largest lender, effectively completing the nationalization of the banking system and pushing the country itself to the verge of bankruptcy.

Citigroup announces it has reached an agreement to purchase the banking assets of Wachovia Corp. in a transaction that would involve Federal Deposit Insurance Corporation (FDIC) protection of losses above US$42 billion in a US$312 billion pool of loans, in return for which Citicorp would grant the FDIC preferred stock and warrants. (Subsequent to this, Wells Fargo & Company announces that it will acquire all of Wachovia Corp. with no FDIC assistance, and this deal transpires.)

October 2008
The largest (US$700 billion) intervention in the capital markets becomes law in the United States.

The U.K. government agrees to commit up to £500 billion to the U.K. banking system in a combination of equity injection into and partial nationalization of a number of the United Kingdom’s biggest banks, underwriting of interbank lending, and liquidity injection.

The U.K. businesses of Icelandic banks are either put into administration or have their assets frozen amid concerns that the many U.K. depositors in Icelandic banks will otherwise lose their money.

Major government capital injections are subsequently agreed upon with leading U.K. retail banks Royal Bank of Scotland, HBOS and Lloyds TSB, in return for (in addition to the financial terms) commitments of certain bonus and dividend restrictions/prohibitions and lending practice commitments to individuals and small businesses.

Government capital injections into major banking groups are announced in France, Germany and the United States.

Central banks across the world cut rates to stimulate the market and mitigate recessionary impacts as the crisis appears to be spreading.

Despite government actions worldwide, the markets remain unconvinced. On Friday, October 10, the Dow Jones suffers its largest-ever point swing and the S&P 500 concludes its worst week since 1933. In Japan, the Nikkei falls almost 10 percent, its biggest drop in 20 years. The FTSE drops more than 10 percent, its worst fall since 1987.

Finance officials from the Group of Seven meet in Washington, D.C., and issue a five-point plan.

In Paris, 15 European Union leaders meet for an emergency summit on the financial crisis.

Regulators in the United States and Europe announce new measures to stabilize the market, including direct capitalization of financial institutions, guarantying interbank lending, and adding or increasing deposit insurance schemes.

The crisis hits the Middle East when the Kuwaiti government is forced to bail out Gulf Bank, which said defaults by counterparties on eurodollar derivatives contracts forced it to seek government intervention.

The Japanese government unveils a ¥5 trillion stimulus package.

Global markets end October with the worst losses in history, despite a strong final week.

November 2008
A Thai government official calls for the creation of an Asian Financial Community for the less-affected Asian financial institutions to help stabilize the global system.

Central banks continue to inject liquidity into the market and to lower rates.

The U.S. government announces a restructuring of its bailout of AIG.

China announces a massive stimulus plan.

American Express receives Federal Reserve approval to become a bank holding company.

The U.S. Big Three automotive companies ask Congress for a US$25 billion bailout.

December 2008
The French government announces a €26 billion stimulus package, which includes support for construction and small business.

The Government of India announces a US$4 billion stimulus package to help the export, real estate and infrastructure sectors.

Sony announces factory closings and the reduction of 8,000 jobs globally in the face of slumping sales of consumer electronics.

The Government of Japan announces that it plans to double the size of its previously announced stimulus plan.

The U.S. government approves funding for the U.S. auto industry, while Canada unveils an emergency loan program for the Canadian subsidiaries of General Motors and Chrysler.

The Irish government announces plans to recapitalize all of its listed banks.

The Federal Reserve approves the application of GMAC to become a bank holding company.

The U.S. manufacturing index falls to a 28-year low.

Companies across the globe announce major layoffs.

January 2009
Retail experts warn that dismal holiday sales will result in significant store closures and retail bankruptcies.

The U.S. Department of Labor confirms that more people lost jobs in 2008 than in any year since World War II.

The Federal Deposit Insurance Corporation (FDIC) reaches a preliminary agreement to sell IndyMac Bank to a consortium of private equity firms, at an estimated loss of US$9.4 billion to the FDIC fund.

Early indications are that the new Obama administration will bring changes in the way TARP funds are allocated, with a shift toward dealing more directly with the foreclosure problem.

Citigroup announces a plan to split into two with separate firms managing its traditional banking business and its riskiest investment assets.

New York University Professor Nouriel Roubini predicts that U.S. financial losses from the credit crisis could reach US$3.6 trillion.

Germany considers an emergency fund of up to €100 billion (US$135 billion) in state-backed loans for companies facing a credit crunch.

Canada unveils a C$40 billion stimulus plan.

Official government figures confirm that the United Kingdom is now in recession for the first time since 1991.

The U.K. government unveils a plan to guarantee up to £20 billion of loans to small businesses to help them survive the economic downturn.

Spain becomes the first country to lose its S&P AAA rating since Japan in 2001.

The French government announces its plan to provide €5 billion in credit guarantees to help Airbus sell aircraft to customers struggling to secure financing.

The Obama administration begins revealing plans for its stimulus program; estimates of the cost of this program range from US$775 billion to more than US$1 trillion.

Outgoing President Bush requests the release of the remaining US$350 billion in TARP funds.

Iceland’s government collapses following political turmoil prompted by the financial crisis.

February 2009
From China comes the news that 20 million migrant workers (15.3 percent of a total of 130 million) have lost their jobs in the country’s coastal manufacturing centers.

China announces that its exports in January suffered the largest drop in 10 years.

The Australian government passes a AU$42 billion stimulus bill.

U.S. unemployment rises to its highest level since 1992.

U.S. Secretary of the Treasury Geithner holds a press briefing on TARP II and world markets decline given the lack of detail provided.

The U.S. government passes a US$787 billion stimulus bill.

The Spanish economy falls into recession for the first time in 15 years.

Deutsche Bank announces a €3.9 billion loss in 2008, its first since its restructuring after World War II.

UBS announces a loss of SF20 billion for 2008 and another large round of job cuts.

Nissan Motors announces plans to cut 20,000 jobs worldwide – 8.5 percent of its workforce – because of a steep decline in sales.


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[i] “A Memo Found in the Street,” Ritholz, Barry L., Barron’s, September 29, 2008, available at online.barrons.com.

[ii] “A financial crisis unmatched since the Great Depression, say analysts,” The Guardian, March 18, 2008, available at www.guardian.co.uk.

[iii] “Roubini Predicts U.S. Losses May Reach $3.6 Trillion,” Meyer, Henry and Daya, Ayesha, Bloomberg.com, January 20, 2009, available at www.bloomberg.com.


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