HSBC 2008 Annual Report Download - page 10

HSBC HOLDINGS PLC
Group Chairman’s Statement
Group Chairman’s Statement
8
2008 was the most extraordinary year for the global
economy and financial services in well over half a
century. It marked the first crisis of the era of
globalised securitisation. And it also marked the first
crisis of the just-in-time global economy as the
impact of the financial crisis fed rapidly straight into
the performance of the real economy.
Causes of the crisis
The causes of the crisis are complex and interrelated.
But we can clearly see that a number of different
factors contributed:
• First, the global financial imbalances that arose
from the accelerating global economic shift
towards emerging markets. The rapid growth of
emerging economies created a macro-economic
triangle, made up of: the major consumer
markets, in particular the US but also a number
of other Western economies; major producer
nations – notably a number of fast-growing
emerging markets which have been
manufacturing a vast range of goods for
consumption in the West; and resource providers
whose wealth of hydrocarbons and other
commodities have helped power the producer
economies and have thus commanded such high
prices until recently. This macro-economic
triangle delivered high rates of growth, but also
created major financial imbalances as producer
nations and resource providers accumulated
massive reserves whilst the US and other
consumer markets ran significant and growing
deficits.
• Second, cheap credit. A large proportion of the
accumulated savings of the producers and
resource providers was invested in the world’s
reserve currency, the US dollar, keeping rates
low. This cheap money fuelled a consumer
boom and rising house prices. It encouraged
increased borrowing by banks and by their
customers, fuelling asset price bubbles
particularly in housing markets. Loose monetary
conditions in the US and in much of the
emerging world gave added strength to this
already potent cocktail.
• Third, securitisation based on overly complex
product structures. The complexity and opacity
of certain financial instruments reached a point
where even senior and experienced bankers and
professional investors had trouble understanding
them. This meant that people were selling and
buying assets whose risks they had not properly
assessed.
• And finally, excessive gearing. Many banks
became overgeared and too dependent on
wholesale funding, which they assumed,
incorrectly, would never dry up. Assets were
created on the back of ever higher leverage, both
direct and indirect. And when the securitisation
market began to collapse, banks found
themselves with assets that they could neither
sell nor fund, so forcing large losses on the asset
side and a funding challenge on the liability side
for which they were entirely unprepared.
The result has been unprecedented stress in the
financial system, and it has led to a major breakdown
in trust. In many countries, huge support from
taxpayers has been required in order to stabilise the
system.
Failings in the banking industry
The industry has done many things wrong. It is
important to remember that many ordinary bankers
have always sought to provide good service to their
customers; but we must also recognise that there
have been too many who have profoundly damaged
the industry’s reputation.
Inappropriate products were sold
inappropriately by many. Compensation practices
ran out of control and perverse incentives led to
dangerous outcomes. There is genuine and
widespread anger that the contributors to the crisis
were in some cases amongst the biggest beneficiaries
of the system.
Underlying all these events is a question about
the culture and ethics of the industry. It is as if, too
often, people had given up asking whether
something was the right thing to do, and focused
only whether it was legal and complied with the
rules. The industry needs to recover a sense of what