The Global Financial Crisis Tony Ciro Triggers, Responses and Aftermath THE GLOBAL FINANCIAL CRISIS This page has been left blank intentionally The Global Financial Crisis Triggers, Responses and Aftermath TONY CIRO Australian Catholic University, Australia II Printed and bound in Great Britain by the MPG Books Group, UK. © Tony Ciro 2012 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Tony Ciro has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identied as the author of this work. Published by Ashgate Publishing Limited Ashgate Publishing Company Wey Court East Suite 420 Union Road 101 Cherry Street Farnham Burlington Surrey, GU9 7PT VT 05401-4405 England USA www.ashgate.com British Library Cataloguing in Publication Data Ciro, Tony. The global nancial crisis : triggers, responses and aftermath. 1. Global Financial Crisis, 2008-2009. 2. Financial crises Case studies. 3. Bank failures. 4. International nance. 5. Economic stabilization. 6. United States Economic policy 2001-2009. 7. United States Economic policy 2009- 8. Structural adjustment (Economic policy) European Union countries. 9. Financial institutions Law and legislation. 10. International economic relations. I. Title 330.9'0511-dc22 Library of Congress Cataloging-in-Publication Data Ciro, Tony. The global nancial crisis : triggers, responses and aftermath / by Tony Ciro. p. cm. Includes bibliographical references and index. ISBN 978-1-4094-1139-0 (hbk) ISBN 978-1-4094-1140-6 (ebk) 1. Global Financial Crisis, 2008-2009. 2. Capital market Law and legislation. 3. Financial services industry Law and legislation. I. Title. K1114.C57 2012 330.9'0511 dc23 2011045192 ISBN 9781409411390 (hbk) ISBN 9781409411406 (ebk) Contents Preface vii List of Acts and Cases ix List of Abbreviations xi About the Author xiii Introduction: Timeline of the Crisis 1 1 Previous Crises 13 2 Triggers of the Crisis 33 3 The Crisis Goes Global 55 4 Financial Markets and the GFC 75 5 Rescue Packages and Policy Responses 93 6 Inquiries and Proposals for Reform 141 7 New Financial Markets Regulation 169 8 The Way Forward 207 Bibliography 219 Index 239 This page has been left blank intentionally Preface Writing a book is always challenging, especially when the topic is a constantly moving target such as the global nancial crisis. The inspiration for writing the book involved the idea of providing commentary on and analysis of one of the most catastrophic global economic events to confront the international economy in the modern era. Not since the 1930s Great Depression has the world witnessed so much panic, volatility and uncertainty in international nancial and currency markets. In what is now described as the “Great Recession,” the millions of workers who lost their jobs as a result of the nancial crisis demonstrate the human face of the modern-day tragedy. The demise of Lehman Brothers was the single greatest catalyst for the global crisis that would eventually undermine condence and trust, even with seasoned and sophisticated investors. Despite staging a recovery following unprecedented government and central bank intervention, the international economy remains fragile and hostage to a “wall of worry.” Headwinds in the form of the European sovereign debt crisis, burgeoning US government debt and global imbalances remain and continue to pose substantial challenges to the international recovery effort. The Chinese proverb, “may you live in interesting times” is often described as a curse. Whilst intended as a curse, it may well be symptomatic of the current turmoil confronting the world’s nancial markets. Indeed, global events in the last decade have demonstrated great upheaval, economically, socially and environmentally. The current nancial crisis has been no different. Financial markets had become dislocated, dysfunctional and disruptive. The global economy now needs a period of relative calm to prevail and a return to stable economic conditions. Indeed, nancial markets all over the world need to experience less interesting times. Publishing with Ashgate requires the manuscript to be peer-reviewed by experts in the eld. I am grateful for the anonymous comments made by the reviewers that have been incorporated in the manuscript. I also want to thank Alison Kirk from Ashgate who was thoroughly professional and provided helpful comments and assistance along the way. I also want to thank my assistant De-anne English-McAdams who provided valuable assistance with the preparation of the Bibliography and Table of Contents. Last but not least, I want to thank my family, who have always provided me with encouragement and support. Tony Ciro Melbourne Australia This page has been left blank intentionally List of Acts and Cases Bank Holding Company Act 1956 (US) Banking Act 1933 (US) Banking Act 1935 (US) Bank Products Legal Certainty Act 2000 (US) China Currency Manipulation Act 2008 (US) Commodity and Futures Trading Act 1974 (US) Commodity Exchange Act 1936 (US) Commodity Futures Modernization Act 2000 (US) Corporations Act 2001 (Cth) Cuomo v Clearing House Association Case No 08-453, 129 S.Ct. 2710 (2009) Dodd–Frank Wall Street Reform and Consumer Protection Act 2010 (Pub.L. 111–203, H.R. 4173) (US) Economy Protection Bill 2008 Emergency Economic Stabilization Act 2008 (P.L. 110-343; H.R.1424). Federal Deposit Insurance Reform Act 2005 (US) Federal Reserve Act 1913 (12 U.S.C. ch. 3) Financial Services Act 1986 (UK) Financial Services Act 2010 (UK) Financial Services and Markets Act 2000 (UK) Fraud Enforcement and Recovery Act 2009 (P.L. 111-21) (US) Futures Trading Act 1921 (US) Gambling Act 2005 (UK) Gaming Act 1710 (UK) Gaming Act 1835 (UK) Gaming Act 1845 (UK) Gaming Act 1845 (UK) Gaming Act 1892 (UK) Gaming and Betting Act 1912 (NSW) Grain Futures Act 1922 (US) Grizewood v Blane 138 ER 578, (UK) Hill v Wallace 259 US 44 (1922), US Supreme Court, Washington, DC [...]... stretches over the years from 2007 to early/mid-2011 This book deals with the events that led to the bursting of the US housing bubble and the associated demise of Lehman Brothers The book also examines the disruption and dislocation in international credit and financial markets during 2008 and 2009, and goes on to examine the fallout and policy responses relating to the financial crisis from 2009 and to late... well as other bank collapses along the East Coast of the United States.15 The damaging runs on banks and other financial institutions created an environment of insecurity and fear that continued to undermine the health and wellbeing of the US and global financial system The second key feature of the Great Depression was the high bankruptcy rates among farmers, small- to medium-sized businesses, and households.16... of the banking crisis that occurred between 1921 and 1936.11 The banking crisis in the interwar years had its origins in Eastern Europe and the Baltic states in the 1920s Banks began to fail in Sweden, The Netherlands, Denmark and Norway.12 This was quickly followed by other bank failures in Austria, Spain, Poland, Japan and Germany between 1923 and 1930 The first large reported bank failure in the. .. be fairly isolated non-events and not capable of producing long-term systemic consequences The focus of much of the current debate has been on asset bubbles and the dangers that they pose to the real economy The housing bubble in recent times has been the source of much of the current analysis This is especially the case in the United States, the United Kingdom, Ireland, Spain and Portugal, where house... purchase the family home Households had also become indebted with the growth of the consumer instalment debt that was another important feature of the financial and banking crisis of the 1930s.17 The rise of small business debt was also occurring during the lead-up to the Great Depression The increase in leverage for households, farmers and small- to medium-sized businesses introduced a new dimension and. .. systemic problem gripping the global banking and financial system In 2008 the collapse and bailouts of building societies such as Northern Rock, and the Lloyds Banking Group in the United Kingdom, and of Bear Stearns, AIG, Washington Mutual, Freddie Mac and Fannie Mae, and Lehman Brothers in the United States all contributed to heightened systemic risk in international financial markets The crisis was not... forward was the demanddriven thesis, largely attributed to the prominent economist John Maynard Keynes.3 The demand-driven hypothesis suggested that declining consumer and investment demand were key triggers, which led to significant decline in industrial output and economic growth Since the US economy during the 1920s was largely driven by manufacturing and construction, declining consumer demand would... hazard and “too big to fail” concerns came to dominate the intellectual discourse among policymakers and regulators, including the US Federal Reserve and the US government.9 The arguments in favour of a Lehman bailout were 6  In testimony provided before the Senate Committee of Government Oversight and Reform, the former US Federal Reserve Chairman described the global financial crisis as a “once-in-a-century... Structure of the Book There has been conjecture as to whether asset bubbles caused, or at the very least triggered, the current crisis.11 The residential housing bubble in the United States was at the centre of the sub-prime mortgage crisis that later spread to the 10  According to Paulson, President George Bush asked whether the current crisis was the worst since the Great Depression, to which the US Federal... from the United States but also interlinked with it in the complex and dynamic process which is globalization China would also be the new engine of global industrial production that would stimulate global growth and 2  The explosion of debt and speculation in the United States over the past 30 years had been described as a major catalyst for the crisis See Foster, J.B and Magdoff, F The Great Financial . The Global Financial Crisis Tony Ciro Triggers, Responses and Aftermath THE GLOBAL FINANCIAL CRISIS This page has been left blank intentionally The Global Financial Crisis Triggers, Responses. Cataloging-in-Publication Data Ciro, Tony. The global nancial crisis : triggers, responses and aftermath / by Tony Ciro. p. cm. Includes bibliographical references and index. ISBN 97 8-1 -4 09 4-1 13 9-0 . 7PT VT 0540 1-4 405 England USA www.ashgate.com British Library Cataloguing in Publication Data Ciro, Tony. The global nancial crisis : triggers, responses and aftermath. 1. Global Financial