Economic history · The 2008 Financial Crisis
Eight steps, about twelve minutes, and a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
Two American firms out of money were rescued in six months and a third was not, and what finally stopped the runs was a government promise to pay rather than any of the lending.
On one October morning the British state announced it would put at least £50 billion into the banks, ending up as part-owner of two of them, and stopped an Icelandic bank moving its British assets, using a law written after the September 11 attacks.
Eight steps take it from that morning to March 2009, when the interest rate reached the lowest it had ever been and the Bank of England started buying instead.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 8
The British government announced on 8 October 2008 that it would put at least £50 billion into the banks.
A loan is paid back with interest and no more, however well the borrower does afterwards. Money put in as capital buys part of the company itself. It takes the losses first, which is why it steadies a bank that lenders have stopped trusting, and it can be sold afterwards for whatever somebody will pay, which may be more than was paid for it or less. Lending stops a bank running out of cash, and only capital fills a hole.
Put it another way. Think of it like the difference between lending a friend the deposit on a flat and buying half the flat with them. One of you gets the same money back whatever happens; the other one shares what happens.
Losses come out of a bank's own money, which its owners have put in, before anybody else loses anything. A bank that has run through £50 billion of it cannot lend again until somebody replaces the money.
The American Treasury announced up to $250 billion for its own banks six days later and took preferred shares instead. A preferred share takes a fixed payment each year and is bought back at what it cost, so its holder cannot gain if the bank recovers.
The choice made on 8 October 2008 decided whether the state could ever come out ahead. A loan is paid back in full and no more; shares sell for more than they cost, or for less.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
For the money it announced on 8 October 2008, what did the British state take in return?
Lloyds Banking Group cost the Treasury £20.3 billion, at an average of 73.6p a share, and left the state owning 43 per cent of it at the peak.
The share the state ended up with was simply the money it put in divided by what the whole bank was worth. The two banks were not worth the same, and no target was set for either share.
The Royal Bank of Scotland cost £45.5 billion, more than twice what Lloyds cost, at an average of 499p a share.
At the peak, what share of the Royal Bank of Scotland did the state own?
For scale. Less than half that money, spent on Lloyds Banking Group, bought the state 43 per cent of it.
In January 2009 the Chancellor said a scheme would be built to pay most of the losses on a named pile of a bank's worst loans. It became the Asset Protection Scheme, and the terms were settled in November 2009.
The bank kept the loans and bore the first slice of any losses on them itself. Above that slice the Treasury paid most of what was lost, so the bank could tell its own lenders that the worst case had a floor under it.
The Royal Bank of Scotland put £282 billion of assets into it, bore the first £60 billion of losses itself, and had 90 per cent of anything beyond that met by the Treasury.
The two banks were on terms that no longer matched by the end of 2009, a year after the state announced it would buy into both. No public account of the crisis gives a reason for the difference.
Lloyds negotiated over the Asset Protection Scheme through 2009 and never joined it. What did it do instead?
The National Audit Office adds those schemes up, counting each one at its own high point rather than on a single day.
Most of the support was a promise that the Treasury would pay if something went wrong, rather than money it paid. A promise costs the Treasury nothing until somebody claims against it, so what was promised and what was paid measure different things. It is also why one auditor can publish more than one figure for the same rescue: change what counts as support, or which day you count it on, and the total moves.
Some of that was cash: money the Treasury paid for shares, or lent, and had to find. The rest was a guarantee, which is a promise that the Treasury will pay somebody else's debt if the bank cannot. A guarantee costs nothing at all until somebody claims against it.
The National Audit Office, which audits government spending, has counted this peak more than once and not got the same answer twice.
Of that peak, £133 billion was cash the Treasury actually paid out. Was the part that was only a promise higher or lower?
A tie counts as correct either way.
For scale. The single largest thing inside the peak is a guarantee scheme for bank debt, at £250 billion.
Go back to 8 October 2008: the Treasury made the Landsbanki Freezing Order at ten that morning, under the Anti-terrorism, Crime and Security Act 2001. It was in force by ten past.
Landsbanki was Icelandic, and its British branch had taken ordinary savers' money over the internet under the name Icesave. Freezing the assets stopped money leaving the country while the British authorities worked out who would pay the savers back.
Councils had money in Icelandic banks too. The Commons Treasury Committee counted 123 of them holding an estimated £919.6 million as at 17 October 2008.
MPs looked at the power afterwards and reported that the Act "stigmatises those subject to it", and that a less blunt instrument would be better.
How much ordinary savers' money did Landsbanki's British branch hold when it failed?
For scale. The compensation scheme behind those savers dealt with more than 200,000 Icesave customers, and 123 councils had about £0.9 billion of their own money in Icelandic banks.
America's Troubled Asset Relief Program paid out $443.5 billion between 2008 and its close.
Much of that went out as shares and loans and came back when the shares were sold and the loans paid back. A rescue costs whatever part of the $443.5 billion never came back.
Most of what never came back went to households rather than to banks. The American Treasury says most of the cost came from the programme's efforts to help struggling homeowners avoid losing their homes.
What did the whole American programme cost over its life?
For scale. The Congressional Budget Office's own estimate of the cost has been published at $356 billion, at $109 billion and at $27 billion, in 2009, 2010 and 2014.
Go back to the summer of 2007. Bank Rate is the the Bank of England sets, and it stood at 5.75 per cent before any of this.
Cutting Bank Rate makes borrowing cheaper for anyone on a rate that follows it, which brings spending forward. It costs a nothing to do, which is why it is done first.
Nine cuts between December 2007 and March 2009 took it from 5.75 per cent to 0.5 per cent, the lowest it had been since the Bank was founded in 1694.
The nine cuts were not the same size. How much did the biggest of them take off in one go?
From March 2009 the Bank of England bought bonds in the market with money it made, which it calls .
Bank Rate sets what it costs to borrow for the next few months and has little grip on borrowing for ten years, which is priced instead by what people will pay for .
Every bond pays the same fixed sum whatever it cost, so whoever pays more for one gets less back on the money they put in. A buyer big enough to push bond prices up therefore pushes returns down, and the Bank of England was that buyer.
Cheaper borrowing over years rather than months was meant to get companies investing and households spending again, at a moment when the rate itself could do no more.
How much did the Bank of England buy in the end?
For scale. Everything the state did for the banks, guarantees and all, came to £1,162 billion at its peak.
Module 5 of 7 in The 2008 Financial Crisis
8 October 2008
at least £50 billion announced for the banks, as shares and not as loansThe two banks
84 per cent of the Royal Bank of Scotland for £45.5 billion; 43 per cent of Lloyds for £20.3 billionThe Asset Protection Scheme
£282 billion of RBS assets in; Lloyds paid £2.5 billion to stay outThe peak of the support
£1,162 billion, of which £133 billion was cashLandsbanki's British branch
£4.5 billion of savers' money, stopped where it wasAmerica's programme
$443.5 billion paid out, $31.1 billion of costBank Rate
5.75 per cent to 0.5 per cent in nine cutsbought instead
£895 billion of quantitative easingYou met four terms in this module
, , ,
£1,162 billion of support and £133 billion of it cash, and only the part that bought shares could ever come back at a profit.
[1] What the government announced on 8 October 2008, and how big it was: Bank of England, press release: Recapitalisation of the UK Banking System, 8 October 2008. Read twice off the PDF, identical both times. Mervyn King, Governor: "A major recapitalisation of the UK banking system of at least £50 billion is a necessary condition for regenerating confidence in the financial system. The recapitalisation, further liquidity support from the Bank of England and the new guarantee scheme amount to a significant step forward in resolving the present crisis." The same release says "at least £200 billion will be made available to banks under the Special Liquidity Scheme", which is module 4's scheme seen from six months later.
[2] What the rest of the world did, and how it differed: Bank for International Settlements, 79th Annual Report, June 2009, chapter VI. Read twice, identical both times: "Governments recapitalised the banks to reduce their financial leverage and increase their solvency. While the UK Treasury used common shares, most governments bought hybrid securities — such as preferred shares or mandatory convertible notes — that combine the stable income stream of bonds with the potential appreciation of common shares." THIS IS WHY SPINE LINK 27 WAS AMENDED: the signed claim said other countries copied Britain, and the BIS says most of them used a different instrument. Its table VI.2 also shows capital injections in eleven of the thirteen economies listed, so the idea spread and the instrument did not.
[3] America's own capital injections, six days later: US Department of the Treasury, press release hp-1207: Treasury Announces TARP Capital Purchase Program Description, 14 October 2008. Read: "Treasury today announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers" and "Treasury will purchase up to $250 billion of senior preferred shares on standardized terms", with nine large institutions already agreed. Corroborated by GAO-10-24sp, which gives the same date and "senior preferred stock, subordinated debt, and warrants". SENIOR PREFERRED, not ordinary: that is the difference the module is about.
[4] What was paid for each bank, and what share of it the state ended up owning: House of Commons Library, Bank rescues of 2007–09: outcomes and cost, SN05748. Read: on RBS, "Total invested was £45.5 billion, and public ownership peaked at 84%" and "The average price per share paid by the Treasury was 499 pence"; on Lloyds, "The total invested was £20.3 billion, and the government's ownership peaked at 43%" and "The average cost per share was 73.6p"; and on the scheme Lloyds left, "Even though Lloyd's never actually participated, it paid a £2.5 billion fee for implicit support during the period of negotiations." The NAO's table gives £46 billion for RBS and £21 billion for Lloyds on a different basis; BOTH ARE PARLIAMENTARY AND BOTH ARE CARRIED, per the treatment.
[5] The insurance RBS took and Lloyds paid to leave: National Audit Office, HM Treasury: The Asset Protection Scheme, December 2010. Read: "RBS would place £282 billion of assets in the Scheme"; "RBS bears the first £60 billion of losses"; "the Treasury meets 90 per cent of losses incurred thereafter"; "the Treasury injected additional capital of £25.5 billion, with a promise of up to a further £8 billion if needed"; and Lloyds "would instead raise additional capital from shareholders, including the taxpayer, and pay a fee of £2.5 billion to exit the Scheme".
[6] What the whole of it came to at the peak, and how much of it was ever paid out: National Audit Office, Taxpayer support for UK banks: FAQs, November 2020. Read twice, identical both times: "Peak support (£bn) Guarantee commitments 1,029 Cash outlay 133 Total peak support 1,162", and "These figures set out our calculation of the total peak support provided to banks, including support that was made available but not used by a specific institution. They are calculated by adding all the support schemes together and removing overlaps." Its own breakdown of the 1,162, all twelve components, which sum exactly: Credit Guarantee Scheme 250, Special Liquidity Scheme 200, Asset Backed Securities Scheme 50, unused recapitalisation fund 13, RBS Asset Protection Scheme 202, RBS ordinary and B shares 46, contingent capital 8, Lloyds Asset Protection Scheme 255, Lloyds shares 21, Northern Rock 60, Bradford & Bingley 46, insolvent firms 11. A FIRST DRAFT OF THIS NOTE LISTED ONLY THE LAST EIGHT and a compliance reader added them up to 649 and said so. It also records that "As each scheme and support facility was available at different times, the total peak support was not all available at a single point in time", which is the health warning that belongs on the headline. THE £850 BILLION (4 December 2009) AND £955 BILLION (15 December 2010) ARE THE SPINE'S, from the NAO's earlier reports, and were not re-fetched, because the National Audit Office's current text carries only the current figure. ONLY THE £850 BILLION PRINTS, and it is cited to naoearly rather than to this note.
[7] What the same body put the peak at when it first counted it: National Audit Office, Maintaining financial stability across the United Kingdom's banking system, HC 91, 4 December 2009. NOT RE-FETCHED THIS SESSION, and that is why it has its own id. The £850 billion peak comes from the spine's signed source note, which attributes it to this report of 4 December 2009. The current National Audit Office text carries only the £1,162 billion, so citing the current text for the 2009 figure would be citing a document that does not contain it. A later session that opens HC 91 should confirm the figure and this note.
[8] The order that stopped an Icelandic bank, and the law it was made under: The Landsbanki Freezing Order 2008, SI 2008/2668. Read twice, identical both times: "Made at 10.00 a.m. on 8th October 2008 Laid before Parliament at 12.00 noon. on 8th October 2008 Coming into force at 10.10 a.m. on 8th October 2008", and "The Treasury, in exercise of the powers conferred by sections 4 and 14 of and Schedule 3 to the Anti-terrorism, Crime and Security Act 2001, make the following Order". THE SPINE SAYS 10.10am; that is when it came into force, and it was made at 10.00am. The module says which is which.
[9] How much British money was inside it, and the only judgement on the record about the power used: House of Commons Treasury Committee, Banking Crisis: the impact of the failure of the Icelandic banks, HC 402, 4 April 2009. Read: "Landsbanki had around £4.5 billion of retail deposits outstanding in its UK branch at the time of failure"; 123 local authorities with an estimated £919.6 million as at 17 October 2008, the Audit Commission's figure as high as £953.53 million, just over 3 per cent of local authorities' total deposits; and on the power, "The use of this Act inevitably stigmatises those subject to it and a less blunt instrument would be more appropriate." NOT FOUND, AND RECORDED RATHER THAN ASSUMED: the spine attributes "approximately 300,000 British depositors" to this report and two readings did not return it. The module prints the FSCS's count instead. HOLE 8 STANDS: this Committee is the only body on the record passing judgement on the use of the Act, in one sentence, and the EFTA Court judgment was not obtained. THE MODULE QUOTES THE SENTENCE AND MAKES NO CLAIM THAT IT IS THE ONLY ONE: an earlier draft said "the only body on the record", which is an exhaustiveness claim no source supports, and a compliance reader refused it.
[10] How many people had money in it, and what the compensation scheme paid out across the crisis: Financial Services Compensation Scheme, FSCS closes book on 2008 banking crisis, 21 September 2020. Read: "more than 200,000 Icesave customers". The scheme also gives a total paid out across the whole crisis; that figure belongs to module 7 and is not printed here or in this note.
[11] What America's programme paid out and what it cost over its life: United States Government Accountability Office, Troubled Asset Relief Program: Lifetime Cost, GAO-24-107033, 7 December 2023. Read: "As of September 30, 2023, the total amount disbursed under TARP-funded programs was $443.5 billion" and "the lifetime cost of TARP-funded programs was $31.1 billion".
[12] What the cost was actually spent on: United States Department of the Treasury, About TARP. Read: "As of September 30, 2023, the total amount disbursed for TARP programs was $443.5 billion" and "The TARP actual lifetime cost was approximately $31.1 billion, most of which was attributable to the program's efforts to help struggling homeowners avoid foreclosure." The second half is the reason the step is worth asking. The earlier CBO estimates the module prints — $356 billion in March 2009, $109 billion in March 2010, $27 billion in March 2014 — come from the spine's source note with their dates.
[13] What the same programme was estimated to cost at four different times: Congressional Budget Office, reports on the Troubled Asset Relief Program, March 2009 to April 2024. NOT RE-FETCHED THIS SESSION, and that is why it has its own id rather than being hung on the GAO's. The $356 billion (March 2009), $109 billion (March 2010) and $27 billion (March 2014) come from the spine's signed source note, which also records $39 billion from the Office of Management and Budget in November 2013 and the CBO's final report of April 2024 at "$444 billion ... $31 billion". Hanging them on gaotarp or ustarp would cite two documents that do not contain them, which a compliance reader refused on 2 September 2026. A later session should open the CBO reports directly.
[14] Every change in the interest rate the Bank of England sets: Bank of England, Bank Rate history and data. Read twice off the database page, identical both times: 05 Jul 2007 5.75; 06 Dec 2007 5.50; 07 Feb 2008 5.25; 10 Apr 2008 5.00; 08 Oct 2008 4.50; 06 Nov 2008 3.00; 04 Dec 2008 2.00; 08 Jan 2009 1.50; 05 Feb 2009 1.00; 05 Mar 2009 0.50. NINE CUTS RUN FROM 5.75% TO 0.5%, and the December 2007 cut is the first of them. The spine's "nine cuts from 5.5%" is one cut out and the module does not repeat it.
[15] What the Bank bought when the rate could go no lower, and how much of it: Bank of England, Quantitative easing. Read twice, identical both times: "In total, we bought £895 billion worth of bonds. Most of those (£875 billion) were UK government bonds. The remaining £20 billion were UK corporate bonds."
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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