Posted by on February 7, 2017 4:21 pm
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10 years ago today, HSBC Holdings, the world’s third-largest bank at the time (and one of the most aggressive players in the U.S. market for low-quality mortgages), sent a chill through the financial world with news that its bad-debt charges will be 20% higher than forecast… and became the first canary in the coalmine of what would become the worst financial crisis of a generation.

“This is a material negative surprise for HSBC,” said John-Paul Crutchley, an analyst at Merrill Lynch.

Foreclosures jumped 35% in December versus a year earlier, according to recent data from RealtyTrac. For the fifth straight month, more than 100,000 properties entered foreclosure because the owner couldn’t keep up with their loan payments, the firm noted.

For its part, HSBC said its overall charge will be about $10.56 billion, about 20% higher than the average analyst forecast of $8.8 billion.

In explaining the outcome, the bank said its own risk projections had failed to predict how many borrowers would fall behind on mortgages as interest rates climbed and saddled them with higher monthly payments.

HSBC’s warning comes just weeks ahead of its planned report of annual results and follows a December trading update that was already bearish on U.S. mortgage debt.

The problem is with HSBC’s portfolio of sub-prime mortgages, which it snapped up in 2005 and 2006, before the U.S. housing slowdown began to bite. Sub-prime loans are sold to home buyers who fail to meet the strictest lending standards.

And that set the ball rolling…

The Global Economic & Financial Crisis: A Timeline

  • Wednesday, February 7, 2007: HSBC announces losses linked to US subprime mortgages.
  • Tuesday, April 3, 2007: New Century Financial, which specializes in sub-prime mortgages, files for Chapter 11 bankruptcy protection and cuts half of its workforce.
  • Thursday, May 17, 2007: Federal Reserve Chairman Ben Bernanke says growing number of mortgage defaults will not seriously harm the US economy.
  • Wednesday, June 2007: Two Bear Stearns-run hedge funds with large holdings of subprime mortgages run into large losses and are forced to dump assets. The trouble spreads to major Wall Street firms such as Merrill Lynch, JPMorgan Chase, Citigroup and Goldman Sachs which had loaned the firms money.
  • July 2007: Investment bank Bear Stearns tells investors they will get little, if any, of the money invested in two of its hedge funds after rival banks refuse to help it bail them out.
  • Thursday, August 9, 2007: Investment bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them, owing to a “complete evaporation of liquidity” in the market. The European Central Bank pumps €95bn (£63bn) into the banking market to try to improve liquidity. It adds a further €108.7bn over the next few days. The US Federal Reserve, the Bank of Canada and the Bank of Japan also begin to intervene.
  • Friday, August 17, 2007: The Fed cuts the rate at which it lends to banks by half of a percentage point to 5.75%, warning the credit crunch could be a risk to economic growth…

Here is Ben Bernanke’s responses to these events…

  • Feb. 15, 2007 – “Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.”
  • March 28, 2007 – “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”
  • May 17, 2007 – “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.  The vast majority of mortgages, including even subprime mortgages, continue to perform well.  Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”
  • Oct. 31, 2007 – “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”
  • Jan. 10, 2008 – “The Federal Reserve is not currently forecasting a recession.”
  • Jan. 18, 2008 – (Two months before Fannie Mae and Freddie Mac collapsed and were nationalized) “They will make it through the storm.”
  • Jan. 18, 2008 – “[The U.S. economy] has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself.”

As Adriano Lucatelli details for finews, on February 7 of 2007, British banking giant HSBC surprised markets with a profit warning connected to write-downs on US subprime mortgages. No-one had any inkling that this was the opening act of what would be the worst economic crisis since the Great Depression began in 1929. The 2007 crisis even eclipsed Black Monday, the stock market crash of 1987, and the collapse of the dotcom bubble of 2000.

After HSBC’s loss report, the disaster gathered pace. On August 9 of the same year, the French bank BNP Paribas announced that it was ceasing activity in three investment funds that specialized in U.S. mortgage debt, and were de facto insolvent. The following month saw a  bank run on the British mortgage lender Northern Rock.

Customers queued outside branches for hours, hoping to withdraw their savings. Northern Rock could no longer survive alone and was taken into public ownership by the British state on February 22 of the following year.

In March of 2008, the once-proud investment bank Bear Stearns allowed itself to be taken over by J.P. Morgan Chase for $236 million, to avoid bankruptcy.

The crisis reached its peak on September 15 with a fury of events. Lehman Brothers filed for Chapter 11 bankruptcy protection, and Merrill Lynch was taken over by Bank of America for $50 billion. The Dow Jones Index suffered its worst single-day loss since the terror attacks of September 11, tumbling 777.68 points to close just over 10,000 points.

Stock Market Movement During the Crisis

(Source: Bloomberg)

How do things look ten years later? Judging by the situation in the U.S., everything seems to be in order. The normalization of monetary policy by the Federal Reserve late in 2015 marked the official end of the financial crisis. The S&P 500 and the Dow Jones have long overtaken pre-crisis values. Since Donald Trump’s election, they’ve even reached new all-time highs.

All’s well that ends well? Not quite. In the eurozone, the outlook is still predominantly gloomy. To save the crumbling banks, governments have had to inject billions. This created a sovereign debt crisis that threatens the survival of Europe’s single currency.

In Europe, the crisis has already claimed its first victim: Greece. The country lies in ruins, and it is not clear how Greece will ever pay back its debts. Without debt relief, Greece would hardly be able to stand on its own feet again, and Grexit would be inevitable. Trouble is also brewing in Italy.

After ten years of stagnation and three of recession, rates of prosperity, employment and savings are on the floor. As a result, populist powers have gained political weight, and the «five-star movement» has even promised a referendum on eurozone membership.

It is still too soon to say that Europe has overcome the financial crisis. Instead, Europe’s unity project remains under threat. The eurozone countries must therefore face up to the removal of the structural weaknesses that were uncovered by the crisis, and introduce sustainable reforms. If they do not manage to do that, there will be extremely stormy years ahead.

If no effective action is taken, the collapse of the eurozone, if not the entire European Union, could well be the delayed result of the 2007 global financial crisis.

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