The world changed in September ’08. The fall of Northern Rock just one year ago heralded the start of a snowballing effect in the worlds’ financial markets, that has gathered speed with unprecedented bewilderment. The UK has experienced recession and financial crisis in every decade , but the huge difference this time around is that it has affected the worlds’ global markets.

In 2007, HSBC Bank identified its potential issues in lending to the sub-prime market in the USA through its subsidiary, Household Finance.Corporation. It identified that US base rates had been held too low for too long and when interest rates began to climb, those borrowers that had over-committed were at serious risk of not being able to maintain their mortgage payments. HSBC did the right thing by owning up to the potential issues, other Banks continued to believe that matters would resolve themselves.

Within 6 months, following global speculation of a slowdown in world economies, 2 of the USA’s largest lenders, Freddie Mac and Fannie May, went to the wall. The world shuddered.

September saw speculation increase that the financial markets were weakening. Bradford and Bingley, once a solid UK Building Society, had sold far too many Buy to Let mortgages over recent years, to the extent that it had to be bailed out totally by the bank of England.

Lehman Brothers, one of the largest Financial Brokers in the USA, gave no notice to its 5000 employees at Canary Wharf in London on 13th September and at 8.30am, all employees were told to clear their desks of personal belongings and not to return. The largest lay off of employees in one day in the UK in over 2 decades.

The global markets were in freefall. Billions were being wiped off of the value of shares every day. The UK Banking crisis had really begun.

Some of the largest UK Banks were in real trouble. Shares in Royal Bank of Scotland had dropped 86% by the first week in October, HBOS dropped by 84%, Lloyds-TSB by 64% and Barclays by 62%. HSBC’s share price had only fallen by 15%. The reasons for this are easy to see HBOS had a funding gap of £198Billion . This is the difference between what the Bank lends out and what it holds in deposits. RBS had a gap of £161Billion, Barclays had a gap of £76Billion, Lloyds-TSB had a gap of 67Billion. HSBC had no gap. They hold more deposits than loans that they have made. A strong position. As a result of the plummet in share prices, HBOS had a stock market value on 8th October of £5Billion, RBS had a value of £15Billion , Barclays £24Billion , Lloyds-TSB £13Billion and HSBC £108Billion. The Government had to act

. On 8th October, UK interest rates were slashed by half a percent to 4.5%, and £500 Billion of taxpayers money was made available to Banks in a historic economic rescue mission - to bail-out certain UK Banks.

Such bail-outs were replicated worldwide, but had limited impact. Consumer confidence in stock markets had collapsed.

Banks worldwide were in the spotlight. 3 of the top banks in Iceland were facing collapse. They had lent far more than the Icelandic government had in its reserves. This meant that bail-out was impossible and collapse inevitable. Thousands of UK savers and corporate bodies had sent their hard-earned savings to Iceland attracted over the last year by higher interest rates. All were to lose out. London Transport had invested £8 Million in Icelandic banks, Dorset County Council £ 6Million and Winchester Council had invested just one month before the Icelandic Bank went bust.

The future?

What is clear is that investors in the UK are now looking for safety first, higher rates second. Money pours into National Savings, Northern Rock and HSBC at unprecedented levels.

The government has bailed out RBS, HBOS and Lloyds-TSB in the last week. Sir Fred Goodwin, Chief Executive of RBS has resigned, having been paid £4.19 Million last year.

On 20th October, ING, with 1 Million UK savers, was bailed out by the Netherlands government for 10 Billion Euros, less than a week after ING took over the deposits of thousands of customers that had accounts at the failed Icelandic Bank. Bizarre !!!

The UK has hit recession. We have been there before . We have recovered. This time, we need to act with our global partners to ensure that Recession does not turn into Depression. As I write, we have a glimmer of light……… the price of food at supermarkets, the cost of utility bills and the cost of petrol have soared over the last year.

This week, we saw Asda and Morrissons take the initiative to lower the price of a litre of unleaded petrol from the average of £1.15 a Litre , to just 99p a litre. You should have seen the queue at those pumps !!

The next month or two may see more Banks , all household names, go to the wall. Confidence must be restored. In the words of Lennon and McCartney, it will be a long and winding road. Watch this space!