Journalism, so the adage goes, is the first draft of history. In 2008, the Financial Times had a once-in-a-lifetime opportunity to report, analyse and comment on the most serious financial crisis since the Great Crash of 1929. Here was a global story whose tentacles spread from the US sub-prime mortgage market to the City of London, Iceland, Russian oligarchs, Dubai property barons and numerous other actors. It was a story tailor-made for the FT.
The following articles are a selection of the best of the FT’s coverage over the past year. Inevitably, there are gaps. There is no space, for example, for our groundbreaking reporting on the credit ratings agencies and the failure of computer modelling. The aim of this special report is to offer readers an unfolding narrative, as well as a broader perspective on a crisis which shook the western model of market capitalism to its foundations.
The opening commentary by George Soros, the financier and philanthropist, sets the scene. Writing in January, Soros argued that the financial crisis is very different from other crises which have erupted at intervals since the end of the second world war. “[It] marks the end of an era of credit expansion based on the dollar as the international reserve currency.” As such, it signals “the culmination of a super-boom that has lasted more than 60 years”.
Soros’s article provides a useful antidote to those commentators who too easily laid the blame for the crisis on lax regulation of sophisticated financial products. Its origins may indeed go back to sub-prime mortgage lending in the US. But sub-prime mortgages – loans to high-risk borrowers seeking a toehold on the residential property ladder – were merely symptoms of a larger problem: global imbalances, in particular a highly indebted US which sucked up the savings of the rest of the world and consumed more than it produced.
Martin Wolf, the FT’s chief economics commentator, has long warned of the threat posed by global imbalances to the world economy. These imbalances include not just the US, but also China’s huge current account surplus conveniently invested in US Treasuries. In late February, Wolf showed he was alert to the scale of the crisis, warning that the US faced “the Mother of all Meltdowns”. He was clear, too, that the banking system would require a bail-out. And he was spot-on with his strictures to policymakers: the crisis could be managed provided the US acted quickly and others followed suit to sustain domestic demand. This holds even truer today.
In hindsight, the late spring and summer were the calm before the September storm. Equity markets recovered ground and oil continued its dizzy rise. Ironically, in the light of the burst of rate cutting which was soon to follow, central bankers were still worried about inflationary pressures. Niall Ferguson, the author, historian and FT contributing editor, struck a more cautionary note in August. He warned that the local squall in the US could easily turn into a global tempest with profound consequences for economic growth.
In a devastating commentary in September, David Blake, an asset manager and former Goldman Sachs analyst, pointed a finger at Alan Greenspan, long feted as the doyen of central bankers and architect of global prosperity during his 18 years at the Federal Reserve. The Greenspan Fed’s policy of low interest rates was not to blame, says Blake, because the US needed low interest rates to avoid a severe recession. “Where Mr Greenspan bears responsibility is his role in ensuring that the era of cheap interest rates created a speculative bubble.”
Blake identifies two fatal lapses in the late 1990s: the failure to prick the dotcom equity bubble and the Fed chairman’s opposition to regulation of over-the-counter derivatives which formed the bulk of counterparty risk in the ensuing explosion of credit. He says: “To create one bubble may be seen as a misfortune; to create two looks like carelessness. Yet that is exactly what the Greenspan Fed did.”
Another warning voice was that of Gillian Tett, the FT’s award-winning capital markets editor. For more than two years Tett, who has a PhD in social anthropology, had pointed to the risks in the sophisticated debt instruments known as credit derivatives. In September 2007, well before before the collapse of Lehman Brothers, Tett identified the heart of the problem. “Although it has been taken as self-evident in recent years that the financial system grows stronger if banks spread their credit risks, some are starting to refine that view …Bankers had become adept at removing credit risk from banks’ balance sheets, either by selling the loan directly to outside investors or, more usually, by turning loans into new securities such as bonds and then selling them on the capital markets.”
In October 2008, Tett assessed the British authorities’ record in the face of the subsequent banking meltdown. After much Bertie Woosterish bumbling, the government announced a £400bn ($538bn) rescue package which recapitalised the banks, drawing lessons from earlier crises in Japan and Sweden. ”Finally – albeit belatedly – they have got something right.”
Samuel Brittan, the renowned FT economics commentator, takes a philosphical approach in a discourse on what he describes as competitive capitalism. His conclusion at the end of an elegant discussion of asset markets and their destabilising role in the financial system is typically succinct: “We need to be reminded of the dictum of Keynes that ‘money will not manage itself’. That goes for credit too.”
For a switch in pace, readers should turn to the account of the downfall of Lehman Brothers, the 158-year-old Wall Street investment bank. Written by the FT’s banking teams in New York and London, the narrative examines the last months of Dick “the gorilla” Fuld, the former bond trader who ran the bank for 15 years. It is a story of management hubris and excessive risk-taking and it raises one of the most tantalising questions of the year: were the US authorities, notably Hank Paulson, US Treasury secretary, right to let Lehman go under?
In November, Queen Elizabeth II asked another pressing question about the global financial crisis: “Why did no one see this coming?” Chris Giles, the FT’s economics editor, examines the record of the world’s pre-eminent economists. His conclusion: many saw a piece of the jigsaw but very few practitioners of the dismal science covered themselves in glory.
Two commentaries offer a broader political perspective. Martin Wolf looks ahead to post-crisis construction and the need for a regulatory overhaul as substantial as the 1944 Bretton Woods agreement. Philip Stephens concludes that the crisis has indeed produced the outlines of a new geopolitical order, not necessarily to the advantage of the US.
These are necessarily preliminary conclusions. In the New Year, a new US president, Barack Obama, will have his say. The world – and the FT – will be watching.