Beginning of October The policy response to the subprime crisis started in earnest after Lehman Brothers' failure in mid-September 2008, accelerated after February 2009, and had become very large by September 2009. Governments have relied on a portfolio of intervention tools, but the biggest commitments and outlays have been in the form of debt and asset guarantees, while purchases of bad assets have been very limited. Announcements directed at the banking system as a whole (general) and at specific banks (specific) were priced by the markets. General announcements tend to be associated with positive returns and specific announcements with negative ones. Moreover, general announcements exert cross-country spillovers but are perceived by the home-country banks as subsidies boosting the competitive advantage of foreign banks. Specific announcements exert spillovers on other banks.
The United States Senate's version of the $700 billion bailout plan, HR1424, modified to expand bank deposit guarantees to $250,000 and to include $100 billion in tax breaks for businesses and alternative energy, passed with bi-partisan support 74–25 on October 1. Reaction in the House was mixed, but in a vote on Friday the House of Representatives passed the Emergency Economic Stabilization Act of 2008, as refashioned by the Senate, 263–171 in a bipartisan vote.
Discussions were ongoing in Europe regarding possible remedies for financial instability in Europe leading up to a conference Saturday afternoon in Paris hosted by Nicolas Sarkozy, president of France. UniCredit of Italy was reported to be the latest bank to come under pressure. During the night of October 2 Greece followed Ireland's lead and guaranteed all bank deposits.
On October 3 it was reported that Wachovia had rejected the previous offer from Citigroup in favor of acquisition by Wells Fargo, resulting in a legal dispute with Citigroup.
In Britain, the Financial Services Authority announced on October 3 that effective Tuesday, October 7, the amount of the guarantee of bank deposits would be raised to £50,000 from £35,000. On Friday, October 3, the government of the Netherlands took over the Dutch operations of Fortis, replacing the bailout plan of September 28.
Over the weekend and on Monday a major banking and financial crisis emerged in Iceland with its currency the krona, dropping 30% against the euro. At a meeting on Monday night emergency legislation was passed granting broad powers to the government to seize and regulate banks. The Landsbanki and Glitnir were seized, while Kaupthing was subjected to a rescue plan.
On October 6, the Icelandic Financial Supervisory Authority decided temporarily to suspend from trading on regulated markets all financial instruments issued by Glitnir banki hf., Kaupþing banki hf., Landsbanki Íslands hf., Straumur-Burðarás fjárfestingarbanki hf., Spron hf., and Exista hf.The Financial Supervisory Authority - Iceland, News: Temporary suspension from trading (06.10.2008)
Before the opening of the business day, October 6, BNP Paribas, the French bank, assumed control of the remaining assets of Fortis following Dutch nationalization of the operations of the bank in The Netherlands. Denmark, Austria, and possibly Germany, joined Ireland and Greece in guaranteeing bank deposits on Monday, October 6. Following this, the FTSE100 index of leading British shares had its largest one-day points fall since it was established in 1984.BBC. Stocks slide despite reassurances. Retrieved 2008-10-06 A banking Bill easing rescues is slated for introduction in the British Parliament on Tuesday, October 7. On October 6, German chancellor Angela Merkel pledged that the government would guarantee all German private bank savings. The government also announced a revised bailout plan for German mortgage lender Hypo Real Estate (HRE).Deutsche Welle. http://www.dw-world.de/dw/article/0,2144,3694172,00.html German Government Under Pressure to Deliver on Crisis Promise] (English) Retrieved 2008-10-06Deutsche Welle. Berlin has Given a Blanket Guarantee for all Private Bank Savings . (English) Retrieved 2008-10-06. (video, English) Merkel: "we also pledge that those who have conducted business irresponsibly will be held to account. The government will ensure that that happens." On Monday, October 6, the Dow Jones Industrial Average closed below 10,000, a drop of 30% from its high above 14,000 a year earlier on October 9, 2007. In Brazil and Russia trading was suspended on Monday following dramatic drops in their markets.
On October 7, the Icelandic Financial Supervisory Authority took control of Landsbanki.The Financial Supervisory Authority - Iceland, News: Based on New Legislation, the Icelandic Financial Supervisory Authority (IFSA) Proceeds to take Control of Landsbanki to ensure Continued Commercial Bank Operations in Iceland (07.10.2008) On the same day, the Central Bank of Iceland announced that Russia had agreed to provide a €4 billion loan,Central Bank of Iceland, The Foreign Exchange Reserves of the Central Bank of Iceland bolstered (07.10.2008; No. 31/2008) Central Bank of Iceland, Foreign exchange reserves (07.10.2008; No. 33/2008) however this was soon denied by Russian authorities, and the Icelandic Finance Minister had to correct the earlier announcement and now stated that discussions had been initiated with Russia on providing a loan to Iceland. This was also denied by Russian Deputy Finance Minister Anton G. Siluanov. Late in the evening, however, Russia's Finance Minister Alexei Kudrin did concede that a request had been received, to which Russia was positive, and that discussions on financial matters would be conducted later in the week when an Icelandic delegation was expected to arrive in Moscow. Standard & Poor's also cut Iceland's foreign-currency sovereign credit rating from A-/A-2 to BBB/A-3 and local-currency sovereign credit rating from A+/A-1 to BBB+/A-2. S&P also lowered Iceland's banking industry country risk assessment from group 5 to group 8, worrying that "In a severe recession scenario, the cumulative amount of nonperforming and restructured loans could reach 35% to 50% of total outstanding loans in Iceland.
On October 7 the Federal reserve announced formation of a Commercial Paper Funding Facility (CPFF) which will serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers.Commercial Paper Funding Facility: Program Terms and Conditions Several countries announced new or increased deposit guarantees: Taiwan outlined plans to double the guarantee to NT$3 million ($92,000)International Herald Tribune. Taiwan doubles bank deposit insurance. Retrieved 2008-10-07 and the European Union agreed to increase guarantees across the EU to at least €50,000 per saver. Several EU states then announced increases on top of this minimum: Netherlands, Spain, Belgium, and Greece each announced they would guarantee up to €100,000.
The government of Britain announced on the morning of Wednesday, October 8 that it would make £25 billion available as "Tier 1 capital" (preference share capital or "PIBS" [Permanent Interest-Bearing Securities]) to the following financial institutions: Abbey, Barclays, HBOS, HSBC Bank plc, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland, and Standard Chartered as part of a bank rescue package. An additional £25 billion was scheduled to be made available to other financial institutions, including British subsidiaries of foreign banks. "In reviewing these applications the Government will give due regard to an institution's role in the UK banking system and the overall economy". The plan included increased ability to borrow from the government, offered assistance in raising equity, and a statement of support for international efforts. The plan has been described as partial nationalization. The crisis was very severe; according to the BBC's Robert Peston on 22 December after interviewing government and banking leaders "For me, what stood out when interviewing this quartet was the revelation about how Royal Bank of Scotland and HBOS were—in October—only hours away from being unable to open for business".
On Wednesday, October 8, the European Central Bank, Bank of England, Federal Reserve, Bank of Canada, Swedish Riksbank and Swiss National Bank all announced simultaneous cuts of 0.5% to their base rates at 11:00 UTC. Shortly afterwards, the Central Bank of the People's Republic of China also cut interest rates.China's central bank cuts reserve requirement ratio, interest rate to stimulate economy, People's Daily Online. Retrieved 2008-10-08 On October 8 there were sharp losses on stock markets worldwide with a loss of over 9% in Japan. Trading was suspended in Russia and Indonesia after steep morning losses. In the United States, following the funds cut by the Federal Reserve, stocks were volatile, finishing down. On October 8 the Federal Reserve loaned AIG $37.8 billion, in addition to the previous loan of $85 billion.
On Wednesday night, October 8, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 króna to the euro after trying to set this peg on Monday, October 6. By Thursday October 9, the Icelandic króna was trading at 340 to the euro when the government suspended all trade in the currency.
On Thursday, October 9, the Icelandic Financial Supervisory Authority took control of the country's biggest bank Kaupþing banki hf.The Financial Supervisory Authority - Iceland, News: Based on New Legislation, the Icelandic Financial Supervisory Authority (FME) Proceeds to take Control of Kaupþing to ensure Continued Commercial Bank Operations in Iceland (09.10.2008) This occurred when the Kaupthing Board resigned and asked the national authorities to take control. This came about when "Britain transferred control of the business of Kaupthing Edge, its Internet bank, to ING Direct and put Kaupthing's UK operations into administration" placing Kaupthing in technical default according to loan agreements. This marked an escalating row between Iceland and the United Kingdom over the growing crisis. All trade was also suspended on the Iceland Stock Exchange until Monday October 13.
On Thursday, October 9, the one-year anniversary of the Dow's peak, the cost of short term credit rose while there were heavy losses in the United States stock market; the Dow dropped below 8600, reaching a five-year low. It was the first time since August 2003 that the Dow closed below 9000; losses were moderate in Europe. The following day, Friday, October 10, there were large losses in Asian and European markets Yamato Life filed for bankruptcy. Beset by falling commodities prices, Russia's stock markets remained closed on October 10. The Russian Parliament passed a plan authorizing lending of $36 billion gained from global oil sales to banks which met creditworthiness requirements. Special attention is being paid to shoring up Rosselkhozbank, the bank which provides credit to the reviving agricultural sector. The amount of funds available is limited due to falling oil prices. The government of the United States, as authorized by the Emergency Economic Stabilization Act, announced plans to infuse funds into banks by purchasing equity interests in them, in effect, partial nationalization, as done in Britain. The Treasury secretary Henry M. Paulson Jr. met Friday in Washington with world financial leaders. A meeting of international financial leaders hosted by President Bush at the White House in Washington is planned on Saturday to attempt to coordinate global response to the 2008 financial crisis. The annual meetings of both the International Monetary Fund and World Bank was scheduled to be held in Washington over that weekend.