Saturday December 27 2008
The 2008 stock market performance will be one for the history books. Investors lost trillions globally as the financial and economic crisis roared.
Here's our ABC-guide to a year that many would prefer to forget, where banks dominated the headlines for all the wrong reasons, and which saw the biggest destruction of wealth in Irish history which analysts and economists have not even begun to attempt to quantify.
A is for the attack of the acronyms. Twelve months ago, who knew what CDOs (Collateralised Debt obligations), SIVs (structured investment vehicles) and CDSs (credit default swaps) were? The names of these esoteric financial products were once only uttered by City and Wall Street types, but have gained common currency in explanations for the US subprime fallout. As it turns out, some of the top brass on Wall Street didn't understand these toxic assets that their minions were creating and trading.
B is for bank bailouts. With banks globally sitting on hundreds of billions of losses from the financial crisis, the US unveiled a plan to buy up $700bn of mortgage-related assets festering away on lenders' balance sheets. As Europe was dragged into the chaos, Ireland became the first country on this side of the Atlantic to rescue its banking system, unveiling its €440bn guarantee scheme on September 30.
A raft of other countries subsequently nationalised and invested in their banks, forcing the Government here to finally announce plans this week to recapitalise the banks with a cash injection worth up to €7.5bn in the three biggest lenders.
While Irish banks were collateral damage from the subprime crisis, they face billions of losses over the coming years from their own bad loans to property developers.
C is for CFDs. Contracts For Difference allow investors to make a leveraged investment in a company -- with an initial outlay of as little as 10pc of the stock's price. If the shares rise, for example, by 10pc, the CFD holder is up 100pc on his original investment. If they fall 10pc, he is wiped out. If share prices drop further, the holder must cover the losses in what's termed a 'margin call' from his CFD provider.
D is for Great Depression. The current financial and economic woes are now commonly viewed by commentators as the worst financial crisis since the Great Depression of the 1930s.
E is for equity. Allied Irish Banks boss Eugene Sheehy famously said in October he would "rather die than raise equity" as the group shored up its balance sheet in the face of rising loan losses.
He was forced to row back on this position this week as he prepared to make a €1bn cash call to shareholders following the Government's decision to pump €2bn into the country's biggest bank.
Bank of Ireland is being recapitalised to the same extent, while Anglo Irish Bank will hand over 75pc control of its voting rights to the State for a €1.5bn investment.
F is for Fannie Mae and Freddie Mac. The two largest providers of funding for US homeloans were effectively nationalised in September as the duo -- who between them guarantee almost half the US's troubled $12 trillion (€8.5 trillion) mortgage market -- teetered on the brink of collapse.
G is for Greenspan. Many observers believe that the policies of Alan Greenspan, who stepped down as chairman of the Federal Reserve after two decades at the helm of America's central bank, have a lot to answer for. They argue the Fed's easy debt policies following the collapse of the dotcom bubble and 9/11 terrorist attacks earlier this decade helped to foster the credit bubble which spawned the subprime crisis.
H is for hedge funds. These are private investment funds that are not generally open to the wider public and, therefore, not regulated in the same way as retail funds. They aim to make money in all types of financial conditions. Many such funds have made hundreds of millions of euro over the past two years as financial stocks plummeted -- through a strategy called 'short selling'. This involves borrowing shares and selling them. If the price drops, they profit by buying back the shares, repaying the loan and pocketing the difference. Many stock market regulators, including the Irish watchdog, banned 'shorting' of financial stocks in recent months.
I is for Iceland. The rapid expansion of the Icelandic banking system for most of this decade made it the envy of Europe as its lenders acquired assets around the continent and funded the empire-building of the country's top entrepreneurs.
It all came crashing down in 2008 as its three top banks were saved from collapse, through nationalisation.
The Nordic nation -- saddled with over $100bn of liabilities and with economic output of just $14bn -- became the first developed country to request an emergency loan from the International Monetary Fund (IMF) in 30 years.
J is for Jesus, as a slew of traders and investors rediscovered God as their stock market bets tumbled amid the financial apocalypse.
K is for Jerome Kerviel, the trader with French bank Societe Generale who hit the headlines last January as the alleged perpetrator of a €4.9bn derivatives trading loss, making it -- temporarily at least -- the biggest rogue trading scandal in financial history.
L is for Lehman Brothers, the US investment banking giant, founded in 1850, whose collapse in September sent the financial markets into virtual meltdown.
M is for Bernard Madoff. The markets were stunned in recent weeks as this Wall Street grandee was charged with masterminding a $50bn fraud at his New York investment advisory firm.
The size of the alleged pyramid scheme scam -- where investors cashing in on their chips were paid by the money put in by newer investors -- has put the Societe Generale incident in the ha'penny place.
N is for Nouriel Roubini, the economics professor at the Stern School of Business in New York University who was nicknamed 'Dr Doom' after making a series of seemingly impossibly pessimistic predictions in 2006. They included: US homeowners defaulting on mortgages, trillions of dollars of mortgage-backed investments unravelling around the globe and the financial system grinding to a halt.
His accuracy was uncanny and IMF economist Prakash Loungani has since called him "a prophet".
O is for Michael O'Leary, who created a diversion from the banking crisis at the start of this month as his Ryanair launched its second attempt to take control of Aer Lingus. The €750m offer has been roundly rejected by the flag carrier, in which Ryanair already holds a 29pc stake.
P is for what's become known as the St Patrick's Day Massacre when banking stocks globally -- particularly Irish financials -- took a hammering following the virtual collapse of Bear Stearns, the US investment bank, which ended up being taken over by JP Morgan in a fire sale.
Q is for Sean Quinn. The billionaire is believed to be nursing a loss of over €1.5bn on the 15pc stake he built up in troubled Anglo Irish Bank last year. His voting rights in the bank are set to be squeezed to 3.75pc by the Government's plans to inject €1.5bn into the troubled lender for 75pc control.
R is for the flurry of rate cuts undertaken by central banks across the globe as they looked to contain the biggest financial crisis in decades. The Federal Reserve shocked markets last week by slashing its key rates to between zero and 0.25pc, while the ECB has opted to cut three times its rates in as many months, taking its main rate from 4.25pc to 2.5pc.
S is for Black September, which marked the climax of the financial crisis. This month saw investment bank Lehman Brothers file for bankruptcy and rival Merrill Lynch being snapped up by Bank of America in an emergency deal; Fannie Mae and Freddie Mac and insurance giant AIG being rescued in the US; the US launching its $700bn bank bailout plan; HBOS being forced into a merger with Lloyds TSB in the UK; and, closer to home, the Government unveiling its €440bn guarantee scheme to stave off a collapse of the Irish banking system.
T is for the resurrection of the takeover battle for Irish Continental Group as former rival bidders, Eamonn Rothwell and Philip Lynch, put aside their differences earlier this month with a view to potentially mounting a joint bid for the ferries group. ICG boss Rothwell's €18.50-a-share management buyout bid for the group last year was quickly scuppered as the Lynch-led Moonduster consortium built up a blocking stake in the business.
U is for the dramatic U-turn in oil prices. Oil prices appeared to be on an unstoppable gallop last July as they soared to a record above $147 per barrel. However, a sharp global economic slowdown has slashed the world's demand for energy, sending it crashing below $40 this month for the first time since the summer of 2004.
V is for Volkswagen. Shares in the German car-making giant soared 400pc over two days in October as news that sports car group Porsche disclosed it controlled 74pc of the group -- a much bigger stake than the market had realised. A raft of hedge funds that had placed bets on a falling Volkswagen stock were caught off guard and lost billions as they scrambled to close off their positions. Some of those hedge funds have filed legal complaints in Germany.
W is for widely-feared stock analyst Meredith Whitney who was the bane of many a US bank as she continued to fire out largely negative research notes on the sector's woes. Whitney became a Wall Street celebrity last year after correctly predicting Citigroup's deepening credit losses and saying the banking giant would slash its dividend and go on a capital-raising spree.
X is for the disappointing search for an X-Factor in the markets as not one stock in the Iseq managed to eke out a gain for the year.
Y is for the Chinese Year of the Rat. Only keen followers of the Chinese Zodiac that decided to jump ship from the stock markets at the start of the ominous year can afford to crack open the champers this Christmas.
Z And, finally, Zzzzzz ... is for the financial regulators who face the criticism for being asleep as the world financial markets descended into chaos.
- Joe Brennan (Irish Independent)