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The 2008 Financial Crisis
Britain buys the banks
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.
Step 1 of 8
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.
The question
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.
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 scaleLess 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?
Module 5 of 7 in The 2008 Financial Crisis
[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.
[2] What the rest of the world did, and how it differed: Bank for International Settlements, 79th Annual Report, June 2009, chapter VI.
[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.
[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.
[5] The insurance RBS took and Lloyds paid to leave: National Audit Office, HM Treasury: The Asset Protection Scheme, December 2010.
[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.
[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.
[8] The order that stopped an Icelandic bank, and the law it was made under: The Landsbanki Freezing Order 2008, SI 2008/2668.
[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.
[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.
[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.
[12] What the cost was actually spent on: United States Department of the Treasury, About TARP.
[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.
[14] Every change in the interest rate the Bank of England sets: Bank of England, Bank Rate history and data.
[15] What the Bank bought when the rate could go no lower, and how much of it: Bank of England, Quantitative easing.
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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