The global financial crisis was years in the making – but unfolded at stunning speed after Lehman Brothers collapsed in September 2008. Chris Burn looks at how Yorkshire was hit.
As shocked employees of Lehman Brothers cleared their desks at the firm’s European headquarters in Canary Wharf on September 15, 2008, they carried cardboard boxes of personal possessions out onto the London streets and into a new world.
An anticipated bailout of what was then America’s fourth-largest investment bank over financial problems linked to the collapse of a housing market bubble propped up by unsustainable mortgage lending had not come to pass, resulting in a company described just days earlier as “too big to fail” filing for bankruptcy with over $600bn of both assets and debts.
As one trader put it as she left the London office for the final time: “It is terrible. Death. It is like a massive earthquake.”
That earthquake was felt immediately on the world’s stock markets and in the following weeks and months after governments around the globe pumped trillions of public money into keeping a banking system that had taken excessive risks from collapse, the consequences soon affected the lives of ordinary people with construction schemes abruptly ending, house prices plummeting and businesses closing.
There had been a creeping sense of doom in the run-up to Lehman Brothers folding but the so-called “credit crunch” had remained abstract to most, even despite Britain falling into recession and the collapse of Northern Rock that began in autumn 2007 and ended with its nationalisation in March 2008.
A fortnight before Lehman’s bankruptcy, Chancellor Alistair Darling, inset, was accused by lobbyists and bank strategists in strong terms of “talking the economy down” - with calls even made for his sacking - after he warned the economic impact would be “more profound and long-lasting than people thought”. But his analysis that Britain was facing its worst economic times in 60 years would actually prove too optimistic.
The woes of Lehman Brothers and other banks and Wall Street firms were tied to investments in the ‘subprime’ mortgage market in the US.
A complex process of financial institutions packaging up mortgages together for accounting purposes – theoretically designed to make investments less risky should one individual be unable to make payments – actually had the effect of making banks feel more willing to lend “subprime” mortgages to customers they would previously deemed as too risky.
The situation was further exacerbated by lenders being given further incentive to make risky mortgage loans through the major increase in the trading of ‘collaterialised debt obligations’ made up of these packaged subprime loans to investors.
The percentage of subprime mortgages more than doubled from eight per cent to about 20 per cent from 2004 to 2006 in the US.
Liam Stanley, an associate fellow at the Sheffield Political Economy Research Institute, says a corresponding housing boom in the UK made this country’s exposure worse when the house of cards crumbled.
“In the US, banks were willing to lend so easily that pushed prices up,” he says. “That created a situation where at some point something would go wrong. That is how bubbles work – as prices keep going up, at some point someone will say ‘I’m not sure the underlying asset is actually worth it’.”
As house prices began to fall in the US after peaking in mid-2006, borrowers found it more difficult to refinance their loans and defaults increased.
Stanley added: “No bank knew how much any other bank was exposed to subprime. Banks got spooked and started refusing to lend to each other, which is normally the wheels in the financial machine that keeps it running.
“That is where the ‘credit crunch’ began and where it starts to affect the real economy in other ways as it becomes more difficult to get loans. If you could have stripped out the US, the UK would still have had its own its crisis but it wouldn’t have been anywhere near as major.”
The domino effect from the shock collapse of Lehman – proving the unimaginable depth of the financial crisis – was immediate as panic gripped the stock market and billions were wiped off the value of leading companies.
On October 3, President George W. Bush signed off a $700bn emergency bailout for the US banking industry to buy out their toxic debts – followed five days later by Prime Minister Gordon Brown announcing a £500bn bank rescue package for the UK.
Last year, Darling revealed how serious things had got. He said the “most scary moment” had come when Tom McKillop, the chairman of Royal Bank of Scotland, was haemorrhaging money as investors and customers took fright. “I said to him, ‘How long can you last?” Darling recalled. “And what he said to me shook me to the core. He said, ‘Well, we’re going to run out of money in the early afternoon’.”
The Government remains a majority shareholder in RBS to this day, despite recently selling off a percentage of its shares at a loss of billions. Following the UK bailouts, interest rates and VAT were cut, but house prices kept crumbling, with the average UK property eventually falling 20 per cent in value in 16 months.
One of the most immediate impacts in Yorkshire was the collapse of Bradford & Bingley bank, which was nationalised on September 29 and had its savings business and branch network taken over by Santander. In May 2009, it was announced the Bradford & Bingley name would disappear from the high street – with its headquarters in Bingley town centre closing.
Howard Martin, past president of Bingley chamber of trade and a former Bradford & Bingley worker who started his career in the firm’s marketing department, says: “Bradford & Bingley employed at its height 1,200 to 1,300 people. That would be a significant number anywhere but in a town the size of Bingley, it was very substantial and the biggest employer in the town.
“That at the same time as the building trade, and everything else was crashing in general. Bingley got a double whammy – it suffered from the same things that every town, city and village was but combined with the loss of the Bradford & Bingley, it really magnified it.
“You used to get hundreds of people arriving at work – the vast majority went for a walk at lunchtimes, did some shopping, bought a newspaper and sweets and some would go for a drink after work. It went in one fell swoop – everything suffered. But despite Bingley suffering the double whammy, a lot of businesses soldiered on and it fared better than some neighbouring towns.”
The distinctive Bradford & Bingley building - once described by Prince Charles as a ‘carbuncle’ - was initially taken on by Sainsbury’s in 2010. That plan for a new supermarket fell through but the building was demolished in 2015 and the land is now in the process of being turned into a new Lidl.
Martin says: “The building was never to everybody’s tastes so when it went down there weren’t too many people saying it should have remained but we didn’t want to see it as a flat, empty piece of land. We wanted something that would in some way helped to regenerate Bingley.
“Bradford & Bingley was where I started my working life, I was in the marketing department. When it finally came to watching it being pulled down, there was a certain amount of sadness for everyone to see it go. I don’t like to use the word icon but it did stand out in the town.”
Major construction projects across Yorkshire also ground to a halt – with perhaps the most notable being the Lumiere plans to build two skyscrapers in Leeds, which was actually put on hold in the months preceding the Lehman collapse in a warning of what was to come.
Work had begun in early 2007 on the site of what was intended to include western Europe’s tallest residential skyscraper at 564ft but construction was put on hold in July 2008, with bosses stating they wanted to wait until the financial climate “stabilised”. Defeat was finally admitted in 2010 as the firm behind the plans announced it was no longer commercially viable and liquidation would be sought – allowing hundreds of buyers whose deposits for flats had been frozen to get their money back at last.
Another victim of the crisis was the £260m Bradford Broadway shopping centre scheme. Acres of land stood empty for years before work finally restarted in 2014 and the scheme opened the following year.
Plans for a £600m revamp of Sheffield city centre were also put on hold in 2009, before finally being axed in 2013. Construction work is currently under way on the first phase of Sheffield Council’s own taxpayer-funded proposals.
Construction of Trinity Leeds shopping centre was also delayed for two years, with the mall eventually opening in 2013. The Trinity Walk shopping centre scheme in Wakefield also came close to collapsing, with KPMG called in as administrators in March 2009. But the half-finished steel structure was eventually rescued by a consortium and the completed site opened in May 2011.
Peter Box, leader of Wakefield Council, says the local authority fought hard to continue the £120m project, making representations to banks and giving “certain guarantees” to make sure the scheme didn’t collapse.
“If that hadn’t gone ahead, it would have had a huge psychological impact on the city. For me, that was a crucial moment because it showed people we weren’t going to sit back and let things happen to us.”
Greg Wright, The Yorkshire Post’s deputy business editor, recalls: “With hindsight we should have seen the gathering storm. When I joined the desk in early 2004, the stock market and corporate world were still recovering from the seismic impact of the war in Iraq. Over the next three years, a bubble emerged driven by reckless lending and ludicrous over-optimism. Too many people bought into the fantasy that we had ended the days of boom and bust.
“The collapse of Lehman Brothers and the bailout of the big banks showed that the economy was built on a house of cards. It was ironic that the financial services sector – which was once regarded as a byword for conservatism – should be at the heart of the problem.
“Workers downed tools for years after the crash. Building work simply ceased. The frankly ludicrous schemes that were planned before the crash – usually built around borrowed money – were forgotten. But what has emerged since is a new realism. The cranes gradually returned to the skyline and major developments such as Trinity Leeds were finally completed. Today, developers are less inclined to indulge in flights of fancy.
“But many small firms still do not trust the banking sector. This is a damaging legacy of the crash and the misconduct that went with it. The banks have a lot of work to do to repair their relationships with the customers they let down so badly during the chaotic autumn of 2008.”
The short-term impacts of the financial crisis saw many long-standing retail companies go to the wall in the following months – among them Woolworths and MFI.
But perhaps the biggest indicator of how life was to change for years to come became clearer in September 2009, when then Shadow Chancellor George Osborne set out his plan for economic recovery that had at its heart plans to cut public spending.
Osborne’s logic was also accepted by Darling, who said in March 2010 that Labour would introduce cuts that were “deeper and tougher” than Margaret Thatcher’s in the 1980s should they win the forthcoming General Election. But he didn’t get the opportunity. In May 2010, the Conservatives and the Liberal Democrats entered a coalition Government with Osborne as the new Chancellor. They infamously arrived to a note from Labour’s outgoing Treasury minister Liam Byrne, which read: “I’m afraid there is no money. Kind regards - and good luck!”
Osborne soon unveiled the biggest UK spending cuts for decades, with an initial £81bn reduction in funding particularly hitting local government and welfare spending.
The age of austerity was born.
Research by the Institute for Fiscal Studies published last week revealed real annual wages are £800 down on a decade ago, despite substantial rises in living costs. Those in their 30s have been particularly hit, earning £2,100 a year less than people of the same age group were in 2008.
As Wright puts it: “Some major property magnates, who had lived the high life during the credit-fuelled boom, disappeared. The policy of austerity targeted those who were least to blame for the crash; those on low incomes who relied on public services that were squeezed relentlessly.
“The people responsible for the crisis have, by and large, got off without any meaningful penalty. Their reputations have been ruined, but you don’t see them outside food banks, struggling to feed their family.”
Efforts to reduce mortgage risks
Risky mortgage lending in the UK has been curtailed by stricter rules introduced in the wake of the crisis, according to a Yorkshire expert.
Ben Pridden, head of residential sales at Savills based in York, comments: “The Financial Conduct Authority’s Mortgage Market Review introduced stricter qualifying criteria in 2011 to prevent a return to risky lending. Whilst sensible there is no doubt this has had an effect on the market, prohibiting some would be buyers upgrading their current homes.”
House prices in the UK bottomed out in February 2009 after falling 19.6 per cent in 16 months.
The once-common tactic of aggressive trading up the housing ladder and the use of interest-only mortgages fell dramatically, while thousands of households dealt with the nightmare of negative equity.
By 2017, interest-only mortgages made up just 1.2 per cent of the market, compared to 32.5 per cent in 2007. Higher deposits are also demanded of buyers.
In Tuesday’s Yorkshire Post: How the region’s public services have been decimated in the last decade.