Chapter 14 An Overview of Corporate Financing 375
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Few developed economies escaped the crisis. As well as suffering from a collapse in their
own housing markets, many foreign banks had made large investments in U.S. subprime
mortgages. A roll call of all the banks that had to be bailed out by their governments would
fill several pages, but here are just a few members of that unhappy band: the Royal Bank of
Scotland in the United Kingdom, UBS in Switzerland, Allied Irish Bank in Ireland, Fortis in
Belgium, ING in Holland, Hypo Group in Austria, and WestLb in Germany.
Who was responsible for the financial crisis? In part, the U.S. Federal Reserve for its policy
of easy money. The U.S. government also must take some of the blame for encouraging banks
to expand credit for low-income housing.^31 The rating agencies were at fault for providing
triple-A ratings for many mortgage bonds that shortly afterward went into default. Last but not
least, the bankers themselves were guilty of promoting and reselling the subprime mortgages.
The banking crisis and subsequent recession left many governments with huge moun-
tains of debt. By 2010, investors were becoming increasingly concerned about the position
of Greece, where for many years government spending had been running well ahead of rev-
enues. Greece’s position was complicated by its membership in the single-currency euro club.
Although much of the country’s borrowing was in euros, the government had no control over
its currency and could not simply print more euros to service its debt. Investors began to con-
template the likelihood of a Greek government default and the country’s possible exit from
the eurozone. The failure of eurozone governments to deal decisively with the Greek problem
prompted investors to worry about the prospects for other heavily indebted eurozone coun-
tries, such as Ireland, Portugal, Italy, and Spain. After several rescue attempts, Greece finally
defaulted in 2011. But it was not the end of the story, and four years later, after failing to get
further assistance, Greece defaulted on a loan from the IMF.
At least with hindsight, we can see that the run-up to the financial crisis saw plenty of
examples of foolishness and greed. Six years after the crisis, bankers remain at the bottom of
everyone’s popularity list. That position has been reinforced by the revelations that several
major banks had been rigging the interest rate and foreign exchange markets. But the lesson of
the financial crisis and the subsequent scandals is not that we don’t need a financial system; it
is that we need it to work honestly and well.
Financial markets in the U.S. and most developed countries work well most of the time, but
just like the little girl in the poem, “when they are good, they are very good indeed, but when
they are bad, they are horrid.” During the financial crisis markets were very horrid indeed.
Think of some of the problems that you would have faced as a financial manager:
∙ Many of the world’s largest banks teetered on the edge or had to be rescued, so that there
were few, or no, safe havens for cash.
∙ Stock and bond prices bounced around like Tigger on stimulants.
∙ Periodically, markets for some types of security dried up altogether, making it tough to
raise cash.
∙ In the eurozone investors could not even be confident that governments would be able to
service their bonds or retain the euro as their currency.
∙ From the peak in 2006, manufacturing profits fell away sharply and the number of busi-
ness bankruptcies tripled.
It must have seemed to financial managers as if they were being assailed from all sides.
We hope that these years were just a very unfortunate blip, and that the world has not
become permanently more complex and risky.
(^31) A rapid expansion of low-income home ownership is generally popular in government circles, and it chimed well with the aspira-
tions set out in President Bush’s goals of an “Ownership Society.”