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9.6  |  27 June 2007 to April 2008
The credit crunch
From September 2007, the global financial crisis became a major focus for the UK
Government. Key events as the crisis intensified are described below.
On 9 August 2007, French bank BNP Paribas told investors that they would be unable to
withdraw money from two of its funds because it could not value the assets in them owing
to a “complete evaporation of liquidity” in the market. This triggered a sharp rise in the cost
of credit, and alerted the world to the start of the credit crunch.162
On 13 September, BBC News reported that Northern Rock had been granted emergency
financial support by the Bank of England. The following day, customers of the bank
withdrew £1bn, the biggest run on a British bank for more than a century.
On 21 April 2008, the Bank of England announced a £50bn plan to help banks by allowing
them to swap high risk mortgage debts for secure government bonds.
At the end of the month, the first annual fall in UK house prices for 12 years was recorded
by Nationwide.
On 7 September, US mortgage lenders Fannie Mae and Freddie Mac were taken
over by the US Government. Together they had lost approximately US$14bn over the
previous year.163
The management of both companies was to be replaced, and they were to be given
access to additional funding. Both were to be administered by the Federal Housing
Finance Agency until their long-term future was decided.
President Bush said: “Putting these companies on a sound financial footing, and reforming
their business practices, is critical to the health of our financial system.”
On 16 September, Lehman Brothers – a major US investment bank – filed for chapter 11
bankruptcy protection, which gives a company time to devise a pan to re-pay its
creditors.164 The BBC reported:
“Unwinding Lehman’s complex deals will take months if not years. During that time
the global financial system will be snarled up. Many banks won’t know for sure how
much they are exposed to Lehman, and will have difficulty freeing up the money in
those deals.
“This in turn is likely to intensify the credit crunch, with potentially dire consequences
for businesses and consumers.”165
On 3 October, the US House of Representatives passed a US$700bn plan to rescue the
US financial sector.166
162  BBC News, 7 August 2009, Timeline: Credit crunch to downturn.
163  BBC News, 7 September 2008, US takes over key mortgage firms.
164  BBC News, 16 September 2008, Lehman Bros files for bankruptcy.
165  BBC News, 16 September 2008, Q&A: Lehman Brothers bank collapse.
166  BBC News, 7 August 2009, Timeline: Credit crunch to downturn.
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