With the retail sector enduring its fair share of challenges, companies are looking at new ways to attract customers, and drive conversion. In an overcrowded, dog-eat-dog marketplace, with behemoths such as Amazon flexing their muscle, it’s easier said than done.
2008 crisis: When Britain stood on the brink
It was revealed this week that the Treasury has now recouped £18.5 billion, and thus more than 90 per cent, of the rescue package the then-Labour Government put forward to bail Lloyds Bank out during the 2008 financial crisis. UK Financial Investments, which manages taxpayer interest in financial institutions, confirmed that the latest sale of shares has seen its current holding dip below 5 per cent – a far cry from the 43 per cent it held eight years ago.
So, is this a sign that the crisis, and subsequent recession, are now behind us?
The fact that there is still a 73 per cent stake in the Royal Bank of Scotland (RBS), not to mention the legacy issues which continue to persist for the bank, would suggest otherwise. And at a time when real wage and global growth remain stubbornly stagnant, the question is begged: why did the events of 2008 have such an enduring impact on the world’s economies?
The fall of Lehman Brothers
There had been relative calm in the UK following Northern Rock’s nationalisation in February 2008. In its May financial stability review, the Bank of England had been largely optimistic about the future, and while the likes of Bear Stearns and mortgage guarantors Freddie Mac and Fannie Mae had been rescued in the United States, then Chancellor of the Exchequer Alistair Darling had been derided for his general pessimism over the summer, despite falling tax revenues.
But on 15 September, 2008, the world suddenly stared into the economic abyss, as the collapse of Lehman Brothers sent shockwaves around the globe. Although the fall of an investment bank thousands of miles away perhaps doesn’t quite evoke the same widespread sense of “I remember where I was when…” compared with events like an assassination, or the climax of an epic sporting showpiece, the palpable fear among those who were experts in investment banking was enough to shake up those who weren’t.
Ironically, Lehman’s fate had been sealed by Darling’s refusal to provide state guarantees for a takeover by Barclays at the 11th hour, although the decision to allow its descent into bankruptcy lay firmly with US Treasury Secretary Hank Paulson – one that was heavily criticised by his colleagues the world over, Darling among them.
But Lehman was the straw which broke the camel’s back, rather than the cause, and the subsequent bailout of AIG two days later – which almost certainly prevented many more major banks following Lehman into extinction – confirmed the extent of the crisis.
The ripple effects and Britain
The impact on the UK was profound and immediate. The interconnectedness of the world’s financial system was underpinned by a dependence on banks lending to each other, and for investment banks in particular to be able to roll over short-term liquidity. In the UK, substantial depositors were suddenly not renewing their deposits, and even willing to pay penalties to withdraw them. It was in effect a silent bank run, and the amounts involved were far bigger than those associated with savers queuing up outside Northern Rock.
By early October, the solvency crisis was so severe that RBS came within hours of running out of money. The bailout package for RBS, along with Lloyds and others, was hastily put together, while those that could raise money themselves were instructed to do so. By the skin of its teeth, and thanks to other countries subsequently following its lead, Britain was pulled back from the brink.
In a later interview with the Guardian, Darling was quoted as saying: "It sent a shiver down my spine. I knew from what had happened to Northern Rock a year earlier what could happen. And this was a massive bank. It would have been a catastrophe had RBS collapsed.
"I am often asked which of my 1,000 days as chancellor was the worst. I am very spoiled for choice, but that was it. We were on the brink of a complete collapse of the world's financial system. RBS would have taken the rest of them down."
No doubt few people would have cried tears for the bankers had these institutions fallen off the cliff edge, and many believe that part of the reason Paulson allowed Lehman to collapse was to make a statement to others: no one is too big to fail. But the consequences of a banking meltdown would have been impossible to quantify. All that was clear is that the economic devastation would have been severe and far reaching.
Lehman’s demise was the watershed moment in the financial crisis, but the wheels for disaster were set in motion much earlier. Problems first arose in the American sub-prime mortgage market, with home loans being widely extended to people who stood no realistic chance of repaying them.
These risky loans were packaged together with those of slightly higher quality; obliging ratings agencies would then give these collateralised securities a higher grade than was warranted, before they were sold off to banks around the world. But when these homeowners began to default on their mortgages en masse – and at the same time - the exposure of the banks quickly crystallised.
Yet even the effect of this could have been minimised had banks not become so over-leveraged. The increase in lending over the decades prior had far outpaced the build-up of capital reserves. So firm was their faith in the efficiency and functionality of autonomous markets - not to mention their disdain for any outside interference or regulation - that the bankers didn’t believe disastrous losses were possible. And if times were to become difficult, their belief was that wholesale money markets would be on hand to ease any liquidity problems.
But of course, these convictions were crushed in the autumn of 2008, as simultaneous mass defaulting coincided with money markets closing their doors.
So, since 2008, have we progressed onto a safer path? Has the taxpayer been fairly compensated? Will we ever be on the hook in such a manner again? And have the guilty parties been held to account?
These are open-ended and complex questions, with debatable answers. In 2010, European regulators began to clamp down on executive pay, while UK banks were hit with a levy in 2011. The Financial Conduct Authority, Financial Policy Committee and Prudential Regulation Authority have also led the way in strengthening banking regulation in the UK, while the Financial Services Compensation Scheme cover for individuals has more than doubled from the paltry £31,700 it stood at in 2007.
However, nearly a decade on, the shadow of 2008 looms large, the economy remains fragile, and the recovery sluggish. Public scepticism in both economic and political institutions is rife, and prosperity continues to be elusive. Of course, there are grounds for optimism, and boom years may well befall us in the not-too-distant future. But if they do, let’s hope that the lessons learned from the 2008 financial crisis, and the reckless abandon which propagated it, are not forgotten.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
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