Financial crisis review 2008

George Walker reviews the background and nature of the recent financial crisis that has unfolded at the national, global and national levels.

George Walker, Centre for Commercial Law Studies, London

The period between January and December 2008 was remarkable in regulatory and financial terms. Conditions were tense but containable at the beginning of the year which relative optimism continued until the end of the summer despite the force acquisition of Bear Stearns by JP Morgan with the assistance of the US Federal Reserve on 17 March 2008. Global conditions then deteriorated sharply in September following the Federal Reserve’s refusal to support Lehman Brothers, which was forced to file for Chapter 11 bankruptcy on 14 September 2008. While credit markets had initially frozen beginning on 9 August 2007 following French BNP Paribas’ decision to suspend three of its investment funds exposed to the US sub-prime market, it appeared that the crisis had been limited to the inter-bank markets and was manageable. Following Lehman’s closure, attention shifted from liquidity to solvency with the stock market prices of many of the major banking and financial groups plummeting. This collapse in more general market confidence was only halted following massive government intervention beginning with the UK decision to launch a three-part recapitalisation, liquidity support and three-year guarantee (credit support) scheme on 8 October 2008. Similar packages were announced in other countries including the US with the earlier Troubled Asset Recovery Program (TARP) being diverted to support capital injections within the banks rather than distressed asset purchase directly. The collapse in confidence and share prices in all of the major world stock markets was nevertheless so severe that attention then shifted immediately to impending global recession and possibly depression beginning end-October 2008.