A seemingly innocuous headline that crawled across traders' screens five years ago today was the flashpoint of a global financial crisis that continues to burn in markets all over the world.
The decision by BNP Paribas to freeze investors' cash inside three of its flagship US sub-prime mortgage funds due to "a complete evaporation of liquidity in certain segments of the US securitization market" is widely regarded as the defining event of the global credit crisis which loped trillions in equity value, destroyed millions of jobs and led to the collapse of several major financial institutions in Europe and the United States.
Investors were already in a cautious mood by the summer of 2007, having been spooked by an earlier profit warning from HSBC, the world's third-biggest bank, after it cautioned that bad loan provisions in its US-based Household Finance unit were at least 20 percent more than originally forecast as the value of mortgages written to borrowers with poor credit histories deteriorated. The concern deepened in July, when Germany's IKB Deutsche Industriebank told investors its US subprime investors were sound and that it fully expected to meet financial targets, only to seek the first of nearly €5bn in state-led rescues one week later to prevent contagion across the entire German banking system.
Within hours of the BNP announcement, inter-bank lending rates began to surge across Europe as banks were unable to assess the size and scope of their rivals' exposure to the US mortgage market, which at that time was valued at nearly $6tn - at least five times more than the entire British economy. Forty-eight hours later, the European Central Bank was forced to provide emergency market assistance for the first time since the September 11 terrorist attacks, injecting more than €95bn in the region's financial system. The US Federal Reserve followed with $24bn in special assistance and the Bank of Canada pledged similar support action.
By early September, Libor was headline news, but not because of allegations of manipulation in the market for unsecured lending, but because banks around the world were unwilling to lend to each other without rock-solid collateral guarantees. Unsecured borrowing costs - the life-blood of financial market economies - sky rocketed to seven-year highs.
The funding crunch pushed UK mortgage lender Northern Rock to seek emergency assistance from the Bank of England in September, a move which precipitated the first genuine "bank run" in nearly two centuries as depositors feared for the safety of their cash and investors dumped shares in the forty year old bank. In February 2008, after two unsuccessful attempts to save the bank minimal taxpayer cost, Chancellor Alistair Darling announced the British government was taking control of the bank, with taxpayers now on the hook for more than £50bn of the failed banks' liabilities.
Similar state-led rescues of the Royal Bank of Scotland, Lloyds TSB and HBOS followed, with Darling injecting more than £37bn into the banks in exchange for a various taxpayer stakes, which the government continues to hold today.
In the US, the Federal Reserve was sufficiently concerned by an impending "credit crunch" in the early days of the crisis that it lowered its key borrowing rate by one half of a percent to 5.75 percent in mid-August 2007. However, a week or so later in its so-called "Beige Book" release, it stated that the credit and housing market disruptions would be "limited" and that "economic activity has continued to expand" nationwide.
The words would come to haunt Ben Bernanke for years - but not until the crisis reached its apex with the collapse of the US investment bank Lehman Brothers in September of 2008 - just 13 months after the BNP Paribas funds were frozen and the credit crisis officially began. The 1,000 point intra-day swings of the Dow Jones Industrial Average convinced foot-dragging US lawmakers to approve Treasury Secretary Hank Paulson's $700bn plan to buy distressed mortgage bonds directly from banks and financial institutions to stop the rot. The Troubled Asset Relief Program", or TARP, was given the green light just two weeks later.
The US economy tail-spinned into recession soon afterwards, taking global economic growth along with it. The International Labour Organization would later estimate that 20m jobs were lost worldwide within a year as a result of the crisis. By the first quarter of 2009, US GDP was falling at an annual rate of 6 percent and unemployment had doubled to 10.1 percent - the highest in 20 years - putting more than 8m Americans out of work.
Global equity markets were estimated to have lost more than $32tn between their 2008 peak and the March 2009 nadir - an amount equal to the entire annual output of the G7 in 2008.
The original credit crisis also sowed the seeds of the current sovereign debt crisis in Europe. Eroding balance sheets across the region's banking sector led authorities to push them to bolster their capital basses with top-quality assets. The resultant surge in government bond buying enabled, in part, the over-borrowing in some European countries as markets failed to properly distinguish risks in Greek, Spanish and Portuguese government debt.
In fact, the parallels between the crises are troubling: in both cases sophisticated investors seemed to blindly rely on the over-optimistic assessment of credit ratings agencies to for their decisions and piled into ostensibly risk-free assets that turned out to be anything but. The major difference five years on is that rescue efforts are focused on government borrowers, not corporate lenders. To date, more than €500bn has been expended to salvange economies in Greece, Portugal and Ireland and investors appear convinced a similar amount will be required to save Italy and Spain from the same fate.
In fact, there's a grim irony to the fact that today also marks the one-year anniversary that the United States lost it Triple-A debt rating for the first time as the economy slowed lawmakers bickered over the $14tn debt ceiling that threatened a potential default for the world's biggest bond market.
The move by Standard & Poor's was expected to ignite a financial market "meltdown" according to Presidential candidate Mitt Romney. Since the S&P decision, US 10-year Treasury bond yield have fallen more than 100 basis points to an all-time low 1.44 percent, the US dollar has risen 12 percent and the S&P 500 has given investors a 15.6 percent return.
Too big to fail, in other words, still seems to apply.