Anatomy of a credit crisis

Northern Rock’s collapse and Citigroup’s disastrous losses stem from the same roots, planted a decade ago, but still not widely understood

By Sean Farrell

Published: 06 November 2007

 

With the credit crisis entering a new and possibly more dangerous phase, and Wall Street heads rolling left, right and centre, the question on everyone’s lips – how did it come to this? – still needs answering. How come the head of the world’s largest bank, Citigroup, has been forced to resign amid billions of dollars worth of losses on American sub-prime mortgage lending?

How come the UK government is on the hook for more than £23bn of rescue finance for the relatively small, regional mortgage bank, Northern Rock? And, after the excesses in credit markets these seven years, are we now about to enter a new age of austerity which will poleaxe housing and other asset prices fed by the era of cheap debt?

Many factors have been blamed for the debt markets’ travails, from greedy investment bankers to miscreant credit-rating agencies, gung-ho, fee-driven mortgage brokers, complacent regulators and the policy of exceptionally cheap money deliberately pursued by Western central bankers.

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