Two years of financial mayhem

Business Times - 02 Jan 2009

Since the start of 2007, the world's biggest banks, insurers and mortgage finance companies have collectively reported US$1.01 trillion of asset writedowns and credit losses and slashed 240,000 jobs - more than half of them in the US. Below is a timeline of the key events as the financial crisis unfolded. Compiled by CONRAD TAN

February 2007: In an early sign of the trouble ahead, London-based banking giant HSBC warns on Feb 8 that provisions for losses on its US sub-prime mortgages could exceed analysts' estimates by 20 per cent, reaching almost US$11 billion.

July 2007: Two hedge funds run by US investment bank Bear Stearns collapse on July 17 under the weight of losses from investments linked to US sub-prime mortgages, despite attempts by Bear in June to save them.

August 2007: Bear Stearns co-president Warren Spector is ousted on Aug 5. On Aug 9, France's largest bank, BNP Paribas, halts redemptions on three funds heavily invested in sub-prime mortgage-related securities.

September 2007: The Bank of England provides an emergency loan to UK mortgage lender Northern Rock on Sept 14, triggering the first run on a British bank in 140 years.

October 2007: Swiss bank UBS and US bank Citigroup reveal huge losses on investments linked to US sub-prime mortgages on Oct 1. On Oct 19, US stocks plunge on the 20th anniversary of Black Monday in 1987.

On Oct 30, UBS confirms a third-quarter net loss of 830 million Swiss francs (S$1.11 billion) after writing down US$3.6 billion on its sub-prime mortgage exposure.

The same day, US investment bank Merrill Lynch says its CEO Stan O'Neal is leaving, a week after the bank reported writedowns of almost US$8 billion.

November 2007: Crude oil prices hit a record high of more than US$96 a barrel on Nov 1 after an unexpected fall in US oil reserves. Swiss banking group Credit Suisse writes down US$1.9 billion and reports a 31 per cent drop in Q3 net profit.

On Nov 4, Citigroup chairman and chief executive Chuck Prince is forced to step down. Three days later, US investment bank Morgan Stanley announces a US$3.7 billion hit from its exposure to sub-prime mortgage securities.

On Nov 16, UK's Northern Rock announces the departure of its chief executive Adam Applegarth and most of its board.

On Nov 26, UK-based HSBC says it will provide up to US$35 billion in funding for two of its off-balance-sheet investment vehicles and move them on to its balance sheet to prevent a forced sale of their assets.

The next day, Citigroup announces a US$7.5 billion capital infusion from the Abu Dhabi Investment Authority to shore up its battered balance sheet.

December 2007: UBS writes down a further US$10 billion and, on Dec 10, announces a 13-billion Swiss franc injection of new capital from the Government of Singapore Investment Corporation (GIC) and a strategic investor from the Middle East.

Morgan Stanley becomes the first Wall Street firm to predict the US economy is likely to slip into a mild recession in 2008.

US commercial bank Washington Mutual says it will quit the sub-prime lending business, cutting 3,000 jobs.

French bank Societe Generale announces the US$4.3 billion bailout of an off-balance-sheet investment vehicle. Its move follows similar rescues by HSBC, Standard Chartered and Rabobank since end-November of so-called structured investment vehicles or SIVs to avoid the forced sale of SIV assets as market prices plunge.

On Dec 19, Morgan Stanley sells a US$5 billion stake to China's new sovereign wealth fund, China Investment Corporation, after revealing a Q4 loss of US$3.59 billion due to US$9.4 billion in mortgage-related writedowns.

On Dec 24, Morgan Stanley's Wall Street rival Merrill Lynch announces a US$6.2 billion fund-raising from private investors, including an injection of up to US$5 billion by Singapore's Temasek Holdings.

January 2008: Oil prices start the trading year on Jan 2 by setting a new record, rising above US$100 a barrel for the first time. On Jan 8, US stocks plunge amid speculation that Countrywide Financial, the country's biggest mortgage lender, may be forced into bankruptcy.
Jimmy Cayne, CEO of US investment bank Bear Stearns, says he plans to step down. Three days later, Bank of America says it will buy troubled Countrywide for US$4 billion.

On Jan 15, Merrill Lynch receives a US$6.6 billion capital injection from foreign investors including the Kuwait Investment Authority, Japan's Mizuho Financial Group and the Korean Investment Corporation through the sale of preferred shares.

Citigroup announces a US$12.5 billion injection of new capital to shore up its balance sheet from investors including Singapore's GIC, which pumps in US$6.88 billion. Citi says that it lost US$9.83 billion in Q4 2007 due to writedowns of US$18.1 billion.

Two days later, Merrill Lynch writes off US$11.5 billion of bad debt and reports a Q4 2007 net loss of US$9.8 billion.

On Jan 21, stock indices worldwide tumble as panic grips investors. In Singapore, the Straits Times Index plunges 6 per cent. The US market is closed for a public holiday, but the plunge in equities elsewhere prompts the US Federal Reserve to slash its benchmark interest rate by three quarters of a percentage point to 3.5 per cent in an emergency move one week before a scheduled policy meeting, to relieve pressure before US markets reopen. Eight days later, on Jan 30, the Fed cuts rates again, by half a percentage point to 3 per cent.

On Jan 24, France's Societe Generale shocks financial markets by unveiling a loss of 4.9 billion euros (S$9.85 billion) due to fraud, saying it will have to raise 5.5 billion euros to shore up its capital due to losses related to US sub-prime mortgages. The rogue trader responsible for the losses is later identified as Jerome Kerviel.

February 2008: The UK government formally announces its intention on Feb 17 to nationalise Northern Rock after failing to find a buyer for the troubled mortgage lender.

On Feb 19, Credit Suisse reveals US$2.85 billion of losses on structured credit positions due to mispricing, caused in part by some of its traders inflating the value of investments in mortgage-backed securities. On Feb 28, insurance giant American International Group (AIG) writes down US$11 billion of mortgage securities and reports its worst-ever quarterly loss.

March 2008: The US Federal Reserve leads a group of the world's largest central banks in a coordinated effort to inject at least US$200 billion of fresh liquidity into money markets in North America and Europe on March 11, just four days after the Fed announced a separate US$200 billion intervention.

On March 13, Carlyle Capital, a London-based bond fund affiliated with US private equity firm The Carlyle Group, goes bust after last-minute talks to renegotiate financing terms with its lenders collapse.

The US dollar slides against other major currencies, falling below 100 yen for the first time in more than 12 years. Crude oil hits a record US$111 a barrel and gold exceeds US$1,000 an ounce for the first time.

On March 14, the US Fed extends an emergency loan to investment bank Bear Stearns through its rival JPMorgan, after Bear's access to liquidity suddenly dries up. At this point, Bear, which was not a commercial bank, could not borrow from the Fed directly. Two days later, after a weekend of frenzied talks, JPMorgan says it is buying Bear for US$2 a share in a deal backed by the Fed. The price is a 93 per cent discount to Bear's last traded price of US$30 on March 14 and values the company at a mere US$236 million.

The Fed cuts its discount rate by a quarter of a percentage point to 3.25 per cent, two days ahead of a scheduled policy meeting on March 18, to prevent a run on major banks when markets reopen on March 17. Still, stock markets in Asia and Europe plummet on March 17 on fears that the sale of Bear Stearns at a massive discount could mean that other financial firms are also in serious trouble. The cost of insuring against default on corporate bonds soars, while the US dollar sinks to new lows against other major currencies.

Gold rises to a record US$1,030.80 an ounce, while US crude oil rises to a new high of US$111.80 a barrel. US stocks plunge at the start of trading as worries spread about the health of other financial firms such as Lehman Brothers, but recover by the end the day.

The next day, the Fed cuts its benchmark interest rate by three quarters of a percentage point to 2.25 per cent, the lowest level since December 2004. Although traders had expected a full percentage-point cut, the reduction sparks a surge in US stocks. The rise is helped by stronger-than-expected earnings reports from investment banks Goldman Sachs and Lehman Brothers.
On March 24, JPMorgan raises its offer for Bear Stearns to US$10 a share from US$2 and agrees to finance the first US$1 billion of any losses associated with the target bank. The new offer values Bear at some US$2 billion.

A week later, on March 31, US Treasury Secretary Henry Paulson announces a broad overhaul of Wall Street regulations, creating a set of federal regulators with authority over all players in the financial system. Lehman Brothers says it will raise at least US$3 billion of new capital to shore up its balance sheet.

News spreads that Swiss bank UBS is expected to reveal further writedowns of up to US$18 billion and seek a capital increase of about 13 billion Swiss francs later in the week. Citigroup unveils a sweeping restructure of its global business, separating them into four regions and breaking out its credit card business from its broader consumer banking segment.

April 2008: UBS chairman Marcel Ospel says on April 1 that he will not seek re-election at the Swiss bank's annual shareholders' meeting on April 23. The bank warns that it expects to lose a net 12 billion Swiss francs in the first quarter due to further write-downs of US$19 billion on its US investment holdings. It also says it will make a 15 billion franc rights issue to boost its capital.
On April 8, the International Monetary Fund warns that total losses and write-downs in the financial sector from the credit crisis could reach US$945 billion. The next day, oil futures reach a record US$112.21 a barrel in intraday trading and end at a record closing price of US$110.87, after a surprise drop in US oil inventories.

On April 10, the Chinese yuan rises to a record 6.99 against the US dollar, crossing the seven yuan per US dollar mark for the first time.

The Monetary Authority of Singapore effectively gives a one-time boost to the Singapore dollar to fight rising inflation by re-centring its undisclosed policy band for the trade-weighted Sing dollar or S$NEER at the prevailing level - widely believed to be near the top of the previous tolerated range. The Sing dollar rises 1.8 per cent to a record 1.3567 against the US dollar. Since MAS's previous statement on Oct 10, 2007, the Sing dollar has gained 7.4 per cent against the US dollar.

Rice prices exceed US$1,000 a tonne for the first time on April 17 as panicking importers scramble to secure supplies, worsening disruption already caused by export restrictions in Vietnam, India, Egypt, China and Cambodia.

Citigroup's chief executive Vikram Pandit says the financial group will slash its cost base by up to 20 per cent. Merrill Lynch says it will cut 4,000 jobs after suffering a US$2 billion Q1 2008 loss, bringing to almost 40,000 the number of jobs lost at financial companies since the onset of the credit crunch.

The next day, Citigroup says it suffered net loss of US$5.1 billion in Q1, its second consecutive quarterly loss, after writing down almost US$16 billion of soured investments. Citigroup also says it will cut 9,000 jobs in the next 12 months.

Oil futures close at a record high of US$116.69 a barrel as news about pipeline sabotage in Nigeria pushes up prices. On April 22, the UK's Royal Bank of Scotland unveils emergency plans to raise £16 billion (S$33.3 billion) through a £12 billion rights issue and asset sales. The rights issue is Europe's biggest to date.

Oil prices reach a record US$118.47 a barrel amid strong demand from China, attacks on oil facilities in Nigeria and concerns about the outlook for supplies from Saudi Arabia.
May 2008: America's AIG says on May 9 that it suffered a record net loss of almost US$8 billion in Q1 2008 due to massive writedowns on credit derivatives and losses on its investment portfolio. The insurer says it plans to raise US$12.5 billion in new capital. Standard & Poor's and Fitch both downgrade their ratings of the company.

Crude oil futures close at a record US$125.96 after climbing as high as US$126.25 a barrel during the day. On May 22, oil futures reach a new high of US$135.09 a barrel in intraday trading after repeatedly breaking previous records earlier in the month.

Swiss bank UBS, one of the worst affected by the credit crunch, launches a 15.97-billion franc rights issue to cover its losses on assets linked to US mortgage debt.

June 2008: UK bank Barclays announces a plan on June 25 to raise £4.5 billion from foreign investors including Qatar Investment Authority to bolster its balance sheet.

July 2008: Oil prices reach an all-time high of just over US$147 a barrel on July 11. In an emergency move on July 13, after a weekend of desperate negotiations, the US Treasury and other government agencies say they will provide liquidity and capital support to US mortgage finance giants Fannie Mae and Freddie Mac, which account for almost half of the outstanding mortgages in the US. The share prices of both firms had plunged the previous week as investors feared that falling US house prices and rising defaults on mortgages would drag them into bankruptcy. The same day, US mortgage lender IndyMac Bank collapses, the second-biggest bank failure in US history.

On July 15, stocks in Asia slump as news emerges that some of the region's biggest banks had billions of dollars invested in debt securities issued by Fannie Mae and Freddie Mac.

August 2008: In a settlement with US regulators over the latest scandal to engulf Wall Street, Citigroup and Merrill Lynch announce on Aug 7 that they will buy back a total of up to US$20 billion in bonds known as auction-rate securities from investors, after some claimed that they were misled by the banks' advisers.

A day later, UBS agrees to buy back US$18.6 billion of auction-rate securities to settle charges of misleading investors over the securities.

Other banks including JPMorgan Chase, Morgan Stanley, Goldman Sachs, Deutsche Bank and Wachovia Corp soon follow with their own settlements. Shares in American International Group (AIG) plummet on Aug 7 after the insurer reports a loss of more than US$5 billion on mortgage-related exposures.

Shares in Fannie Mae and Freddie Mac plunge further after both report multibillion-dollar quarterly losses. Fears grow over the fate of both firms, as well as that of Lehman Brothers, which is trying desperately to raise cash from investors in China and South Korea. Oil falls to US$115 a barrel.

On Aug 12, UBS announces plans to separate its wealth management, investment banking and asset management business units, after reporting a fourth straight quarterly loss and massive withdrawals of funds by clients. UK chancellor Alistair Darling warns on Aug 30 that the country faces its worst economic downturn in 60 years.

September 2008: The US government takes over Fannie Mae and Freddie Mac on Sept 7 in one of the biggest bailouts in US history after a weekend of frantic talks, reminiscent of the dramatic attempt to save Bear Stearns in March. Investors' fears turn to the four remaining independent Wall Street investment banks - Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs - as well as insurer AIG.

After days of searching frantically for a buyer, Lehman files for bankruptcy protection on Sept 15, while Merrill agrees to be taken over by Bank of America for US$50 billion, capping Wall Street's worst-ever weekend.

On Sept 16, financial markets worldwide plunge into chaos. The US government announces an US$85 billion emergency loan for AIG to save the insurer from bankruptcy, in exchange for a 79.9 per cent stake in the company.

As news of Lehman's collapse and the extraordinary takeover of Merrill spreads, markets in everything from stocks and currencies to credit derivatives strain to cope with the fallout.

Stunned investors flee equities for government bonds and gold, while interbank lending rates jump to record levels as banks jealously hoard cash, causing credit markets to seize up.

A day later, HBOS, the UK's biggest mortgage lender, is taken over by Lloyds TSB in a £12 billion deal after a run on HBOS shares. Stocks worldwide continue to gyrate wildly. In Russia, trading is halted indefinitely by regulators.

On Sept 18, central banks worldwide inject US$180 billion of US-dollar liquidity into money markets in a desperate bid to lower interbank borrowing costs and calm financial markets.

The next day, regulators in the US and UK ban the short-selling of shares in financial companies, blaming it for recent declines in financial stocks. News emerges that the US government is preparing a plan for a mass rescue of the financial sector.

On Sept 21, Goldman Sachs and Morgan Stanley, the last surviving independent investment banks on Wall Street, receive emergency approval to become commercial banks, to avoid the fate of Lehman and Bear Stearns. Australia, Taiwan and the Netherlands join the US and UK in announcing restrictions on short-selling to prevent investors from betting that stocks will decline.

On Sept 24, Hong Kong's Bank of East Asia faces a run by depositors after rumours spread that the bank has liquidity problems. Its shares plunge. The Hong Kong Monetary Authority says it will provide full liquidity support to the bank, if necessary.

In the US, the Fed increases its swap lines with other central banks, adding Australia, Norway, Sweden and Norway to a list that includes the European Central, the Bank of England and the Bank of Japan.

The next day, Washington Mutual is seized by regulators and sold to JPMorgan Chase for US$1.9 billion, making it by far the biggest bank failure in US history to date. A bailout plan for the financial sector is mired in doubt as US lawmakers argue over details including safeguards over the use of taxpayers' money.

On Sept 28, US policy-makers announce a tentative deal that will allow the US Treasury to buy up to US$700 billion in troubled assets from ailing banks.

In Europe, banking and insurance group Fortis is bailed out by the Belgium, Dutch and Luxembourg governments. The next day, US lawmakers reject the bailout plan by a narrow margin, throwing financial markets into disarray. The Dow Jones index plunges a record 778 points or 7 per cent, while the S&P 500 index falls 8.8 per cent.

Wachovia agrees to be bought by Citigroup in a deal backed by US regulators. UK banking group Bradford & Bingley is bailed out, as is Iceland's third-largest bank Glitnir, while the German government announces plans to rescue Hypo Real Estate, one of the country's biggest banks.

On Sept 30, Ireland's government guarantees deposits and debts at six financial institutions after Irish banks suffered the biggest one-day fall in their share price for two decades on Sept 29.

Central banks worldwide again flood interbank markets with money. The overnight US-dollar London interbank offered rate or Libor, the rate that banks charge one another to borrow US dollars, jumps to 6.9 per cent from 2.6 per cent a day earlier, the biggest-ever one-day increase.
European bank Dexia is bailed out by the Belgian, French and Luxembourg governments.

October 2008: US lawmakers approve the sweeping rescue plan aimed at saving the financial sector. Stocks in the US fall after the vote is announced on Oct 3, ending the week with their worst performance since markets reopened after the Sept 11, 2001 terrorist attacks.

Economic data shows the US labour market lost 159,000 jobs in September, the biggest decline since March 2003.

Central banks pump more money into the banking system, lowering overnight Libor. But three-month Libor rates for interbank loans in pounds, US dollars and euros continue to rise. The spread between three-month dollar Libor and three-month US Treasury bills reaches record levels as investors seek the safety of US debt and shun lending in the money market.

US bank Wells Fargo makes a surprise offer for Wachovia, trumping Citigroup's earlier deal to buy the bank. Two days later, on Oct 5, the German government guarantees savings in all German bank accounts to avert panic after a rescue plan for Hypo Real Estate collapses.

The next day, the Danish government guarantees all bank deposits in Denmark.

On Oct24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct16, 1989 - to finish the week with a staggering loss of 14.8 per cent.

On Oct 7-8, Iceland's government formally seizes its three biggest banks - Kaupthing, Landsbanki and Glitnir - as the entire country teeters on the brink of economic collapse. On Oct 8, central banks in the US, Canada, UK, eurozone, Sweden and Switzerland cut rates simultaneously in an unprecedented joint effort to stabilise financial markets and to lower borrowing costs. China also lowers interest rates.

The UK government announces plans to pump up to £250 billion into the country's largest banks, including the Royal Bank of Scotland, Lloyds TSB and HBOS, to boost their capital, and provides a further £250 billion in guarantees for new debt issued by UK banks.

Days later, on Oct 14, the US government decides to use the first US$250 billion of US$700 billion in bailout money - originally intended for buying troubled assets from banks - on a similar plan to buy direct stakes in banks in an attempt to restore confidence to the financial sector.

On Oct 15, the Dow Jones index fell 7.9 per cent - its biggest percentage fall since Oct 26, 1987 - as new data shows the US economy slipping into recession. The next day, the Straits Times Index slumps 5.3 per cent, extending its two-day decline to 8.3 per cent.

After trading ends on Oct 16, the Singapore and Malaysian governments say they will guarantee all bank deposits, following similar moves by governments elsewhere, including Hong Kong, Indonesia, Australia and New Zealand.

Switzerland's government announces a sweeping rescue of its entire banking sector, including emergency cash infusions from the public purse for UBS and a toxic-asset dump for removing troubled assets from banks' balance sheets.

Despite the unprecedented efforts to calm financial markets, stocks worldwide continue to fluctuate violently as the damage from the credit crisis spreads to the broader economy.

Analysts grow increasingly worried that the three biggest us carmakers - General Motors, Ford and Chrysler, which have suffered from plunging sales amid a weakening economy - could collapse, causing hundreds of thousands of job losses and triggering further chaos in financial markets.

On Oct 24, The Straits Times Index suffers its biggest one-day fall in almost two decades, ending one of its worst weeks in recent memory. The stock benchmark plunges 8.3 per cent - its biggest percentage drop since Oct 16, 1989 - to finish the week with a staggering loss of 14.8 per cent.

On Oct 29, the US Fed extends temporary swap lines to Singapore, Korea, Brazil and Mexico to ensure sufficient US-dollar liquidity in the respective banking systems.

A day later, the Fed cuts its key interest rate to one per cent from 1.5 per cent.

November 2008: On Nov 5, Barack Obama wins the US presidential election. The next day, the International Monetary Fund (IMF) warns of a global recession in 2009 as the outlook for the world's biggest economies deteriorates further.

The IMF extends a US$16.4 billion emergency loan to Ukraine on Nov 6 to shore up its economy. Later in the month, the IMF approves emergency loans to Iceland on Nov 20 and Pakistan on Nov 25 to stabilise their economies.

On Nov 7, DBS Group says it will slash 6 per cent of its work force or some 900 jobs by the end of the month, as it reports its worst quarterly performance since the end of 2005. Two days later, China announces a four-trillion yuan (S$840 billion) stimulus plan to spur economic growth. On Nov 17, Citigroup announces plans to slash some 50,000 jobs worldwide, aiming to reduce its headcount to 300,000 'in the near term' from 352,000 at the end of September.

On Nov 23, the US government announces a US$20 billion rescue plan for Citigroup after its shares plunge more than 60 per cent in a week.

On Nov 25, the US Federal Reserve says it will inject another US$800 billion into the economy. A day later, the European Commission unveils a 200 billion euro plan to spur economic growth.
December 2008: The US National Bureau of Economic Research confirms on Dec 1 that the US economy is in a recession that started in December 2007.

On Dec 4, Credit Suisse says it will slash 5,300 jobs or 11 per cent of its global work force by the middle of 2009, as it warns of massive losses from its investment banking business. A week later, Bank of America says it will cut up to 35,000 jobs after its takeover of Merrill Lynch.

On Dec 9, the yield on three-month US Treasury bills fall below zero for the first time in history. Yields on other US government securities also reach all-time lows as investors, desperate for safe havens ahead of the year, become effectively willing to pay the US government a fee to safeguard their money for later.

The World Bank warns that international trade volume is likely to contract in 2009, for the first time since 1982.

On Dec 11, Bernard Madoff, a US money manager based in New York, is arrested after confessing to running a US$50 billion Ponzi scheme. The news sends shockwaves through the global financial community as investors ranging from hedge funds to wealthy individuals scramble to estimate their losses from the biggest fraud in history. On Dec 16, the Fed slashes its benchmark interest rate from one per cent to a range of zero to 0.25 per cent, the lowest since records began.

Three days later, Japan's central bank cuts rates to 0.1 per cent from 0.3 per cent, as the government warns that the economy will stagnate in 2009.

In the US, the government agrees to lend up to US$17.4 billion to its biggest carmakers - General Motors, Ford and Chrysler - to keep them afloat until early 2009.

On Dec 22, DBS Group warns that its net profit is expected to slide further in Q4, as it announces plans to raise some S$4 billion in new capital through a rights offer.

On Dec 30, the US Treasury injects US$5 billion into GMAC, the financing arm of General Motors, and lends another US$1 billion to GM to be re-invested in GMAC. The government bailout extends the ability of cash-strapped GMAC to lend to car buyers, which it hopes will boost sales of ailing US carmakers.