It will be remembered as the year when boom turned to bust � and Scotland�s hallowed banks turned to dust. As 2008 began, most pundits still believed there might be no recession, let alone a crisis of world capitalism.
It will be remembered as the year when boom turned to bust - and Scotland's hallowed banks turned to dust.
As 2008 began, most pundits still believed there might be no recession, let alone a crisis of world capitalism.
However, it began to dawn on the financial markets in January that there might be more to the credit squeeze than a few sub-prime loans going sour in the US.
On January 16, the FTSE-100 closed below the 6000-point level for the first time since the early stages of the crisis in August 2007. The following week it sank briefly below 5600, but rallied and stayed above that level remarkably until the end of June, when the rot really set in.
The news from the big global banks in January was hardly reassuring, with final quarter losses reported of $14bn at UBS, $18bn at Citigroup and $11.5bn at Merrill Lynch, while the more vulnerable Washington Mutual also posted losses.
On February 17, the government announced that Northern Rock was to be nationalised, a few days after the first signs of distress at Bradford & Bingley, where sub-prime provisions of £226m had halved profits.
A similar write-down was announced on February 28 by the much bigger HBOS, as it unveiled profits of £5.7bn and pulled out a dividend rise of 18%.
Chief executive Andy Hornby praised a "resilient performance in demanding market conditions", complaining only that the credit squeeze had added up to £180m to the cost of funding its mortgages, depressing its net interest margin from 1.72% to 1.63%.
Hornby, clearly factoring in a high cost for the rest of the year, said: "There will come a time when wholesale funding costs start to ease back, it may be late 2008 or early 2009, but at that stage you'll see a really resilient margin performance."
He said the bank's 65,000 employees, more than a quarter of them in Scotland, would share a bonus of £280m.
Peter Cummings, chief executive of HBOS's corporate division, said the bank would benefit from falling amounts of lending. "We are seeing margins creep up and those margins are sticking," he said, though Hornby added that the bank would be "selective about the deals we do".
The shares slipped from 705p to 648p.
The following day Royal Bank of Scotland reported. All-conquering leader Sir Fred Goodwin hailed a 9% rise in underlying profits to £10.3bn, even after increasing its write-downs by £400m to £1.6bn, and shareholders applauded a rise in the dividend of a confident 10%.
In response to concern among some institutional investors that the blockbusting acquisition of ABN Amro at the top of the market by Royal Bank had depleted its capital base, to a tier one ratio of only 4.5%, and that it really needed to raise £12.5bn to match European ratios, Goodwin said: "The capital ratios are there. If you want to go and make up your own, feel free ... It becomes a bit difficult to have a reasonable and rational conversation when people invent their own ratios."
Johnny Cameron, head of the global markets division, said there were only two or three other companies that now had the same scale as Royal in these markets. "The big are getting bigger and the big are succeeding," he said.
Royal Bank of Scotland shares slipped 8p to 402p.
On March 16, Bear Stearns, the US's fifth-largest investment bank, collapsed into the arms of JP Morgan. Three days later, HBOS shares came under attack from short-sellers, crashing below 300p each before rallying in a highly volatile session. The Financial Services Authority investigated the trades but found no smoking guns. On March 25, an HBOS spokesman expressed satisfaction at the largest-ever one-day rise in the bank's share price, up 15% at 544p.
Losses from toxic debt instruments were still mounting. On April 1, Deutsche Bank reported credit losses of $3.9bn in the first quarter of 2008.
On April 21, a report from JP Morgan estimated that the UK's big four banks had a capital shortfall of £37bn, led by £13bn at the Royal and £11bn at HBOS, and rights issues were inevitable. That day, Prime Minister Gordon Brown summoned banking chiefs to Downing Street to try to persuade them to oil the wheels of lending, as the Bank of England unveiled a £50bn fund enabling banks to swap risky mortgage-backed assets for government bonds.
Within 24 hours, the Royal Bank of Scotland had launched a £12bn rights issue, the biggest yet by a UK company, at a very deep discount of 200p a share. It was adding £5.9bn to its US write-downs.
The next day at the bank's annual meeting, Goodwin remained silent behind chairman Sir Tom McKillop except when pressed by one shareholder to answer a question directly. He said the volte-face on ratios had been "painful and unwelcome".
On April 29, HBOS said it would ask shareholders for £4bn, after writing down £2.8bn on toxic investments.
Hornby said: "We are planning for a more challenging environment ahead", but unlike the Royal chiefs, did not apologise to shareholders saying only he was "willing to be judged" on the success of the strategy over the next three to four years. The new HBOS shares were to be offered at a knockdown 275p and, like the Royal, the interim dividend was to be paid in yet more shares.
On April 30, the FSA admitted to a string of failings in its supervision of Northern Rock and said heads had rolled. Gordon Brown, meanwhile, was also forced to admit to "mistakes" over the 10p tax rate fiasco.
On May 12, HSBC wrote off $3.2bn for its first quarter exposure to the US sub-prime market.
In the same week came a deeply-discounted £300m cash call from buy-to-let specialist Bradford & Bingley, which had only four weeks earlier set its face publicly against such a move, and news of a £391m write-off at Alliance & Leicester, which raised half of its funds in the wholesale market.
On June 2, Bradford & Bingley issued another profits warning and repriced its rights issue from 82p to 55p a share.
On June 9, the Royal said its cash call had won 95% support from shareholders, and two days later in a trading statement Goodwin said: "The business continues to perform satisfactorily."
But it was a different story at HBOS later that month where the underwriters were left with 92% of the shares.
Banking shares had endured a torrid few weeks, and on June 13 the FSA intervened to ban short selling during rights issues.
On the first day of the new regime HBOS shares fell Continued from Back Page below the new issue price, and they failed to recover by mid-July when the cash call closed with 92% of the shares left with the underwriters.
Meanwhile, barely two months after its profit warning, Alliance & Leicester had hoisted the white flag in the face of a bid from Santander worth 317p a share, an improvement on the previous day's 220p, but less than half the 680p which the Spanish bank was said to have offered unsuccessfully for the bank in late 2007.
On July 17, Bradford & Bingley shareholders approved an artificially-induced rights issue, leaving six of its major banking rivals as its biggest shareholders.
On July 22, Washington Mutual reported a $3.3bn loss for the second quarter, and at the end of August Dresdner Kleinwort was mopped up by Commerzbank.
In September, a year after Northern Rock, came a new and far more critical phase of the crisis, as in the first weekend the US housing giants Fannie Mae and Freddie Mac were placed in "conservatorship" and then, the following weekend, Lehman Brothers went into administration.
Within 48 hours of the Lehman news breaking, Merrill Lynch had been rescued by bank of America, AIG by the US Treasury, and HBOS was in talks with Lloyds TSB about a government-backed merger.
On September 17, the FTSE-100 closed below 5000 points for the first time in three years, and the following day the prime minister called for an end to "irresponsible behaviour" in the City, as the FSA imposed a temporary ban on the short-selling of banking stocks.
On September 26, Washington Mutual was seized by federal regulators overnight and sold to JP Morgan for $1.9bn.
By the end of the month, Bradford & Bingley had collapsed into nationalisation, with Santander picking off the savings book.
On October 7, the banking crisis spread to Iceland, where banking deposits of £14bn were nine times the country's economic output.
Landsbanki's Icesave froze some £4bn of UK savers' deposits, prompting the UK government to freeze Icelandic assets in the UK using anti-terrorist laws, sparking further collapses - including Iceland's biggest offshore bank Kaupthing Isle of Man where expatriate Britons holding some £800m of deposits were unprotected.
On October 8, the chancellor announced a £500bn rescue package for the banks, but the last day of the week saw a panic-ridden 10% fall in the FTSE-100 to 3847.
On October 13, the government announced its £37bn recapitalisation of the banks, notably Royal Bank of Scotland (£20bn) and Lloyds-HBOS (£11bn), which could see it holding almost 60% of the Royal and 43% of HBOS , and appointing five directors between the two boards.
The terms included the departure of both chairmen, both chief executives, and the Royal's Johnny Cameron, all without severance pay.
Goodwin was "sad", though not contrite, at his departure, while Hornby was similarly muted, and has since been offered a consultancy role by Lloyds TSB.
It was noted that Goodwin had picked up £15.5m, and Hornby £6.9m over the previous five years - though bonuses ploughed into their banks' shares had cost them £13m as the shares collapsed. Goodwin's £8.4m pension pot will be worth £579,000 a year on retirement.
On November 4, the Royal's incoming chief executive Stephen Hester unveiled a £692m first-half loss for the bank, amid a rapidly deteriorating UK and global economic scenario.
A few days later Sir Peter Burt and Sir George Mathewson, who ironically had themselves led the expansionist charge of the Scottish banks, called for a coup against the Lloyds TSB takeover. They claimed HBOS could stand alone and that a weakened Lloyds was receiving a proportionately bigger bailout cheque.
But the sally quickly petered out, and on November 19 Lloyds TSB shareholders voted to approve the deal.
Next came a near zero take-up by Royal Bank shareholders of the 65.5p issue, while the shares were languishing at barely 50p. In late November, the taxpayer became a 57.9% shareholder in Royal Bank of Scotland.
In a last-ditch legal battle against the HBOS deal, the Merger Action Group tried unsuccessfully to persuade the Competition Appeals Tribunal that Business Secretary Lord Peter Mandelson had illegally waived competition rules, because a prior decision to push the merger through had already been taken by the chancellor and prime minister.
But on December 12, as Woolworths closed its doors and industries worldwide grappled with financial meltdown, shareholders in HBOS gave a green light to the merger.
Taxpayer control had quickly led to strains on both Scottish banks' commercial lending policies, with repeated foot-stamping by the government to shame them (and other banks) into lowering interest rates and raising loan volumes, in both the mortgage and small business markets.
In December, in another nod to culture change, Royal Bank announced that it would become the first high street bank to offer free financial advice, to all comers.
The winds of change are blowing.
