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Deputy Governor of the Bank of England, Rachel Lomax, for example, has referred to the unfolding multi-dimensional nature of the ‘largest ever peacetime liquidity crisis.’4 Alan Greenspan, the former Chairman of the Federal Reserve, agrees. He suggests the debacle

is likely to be judged in retrospect as the most wrenching since the end of the Second World War…Those of us who look at the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked



This assessment mirrors that of Timothy Geithner, the President of the Federal Reserve of New York:

Uncertainty about the future, and the greater complexity of leveraged structured products, created a dense fog around estimates of potential loss, making institutions and markets more vulnerable to an adverse surprise when conditions changed, and making it harder to manage the many principal agent problems inherent in the financial business. In effect, some major banks and investments banks made the choice to follow the market down as

underwriting practices eroded.


The search for yield has been replaced by an urgent need for recapitalisation. Central banks in the United States, Canada and Europe have enhanced the type of collateral accepted in return for short-term financing. In the case of the United States Federal Reserve, the range of institutional actors able to avail of its discount-lending window has been stretched to – and arguably surpasses –formal legal power.7 Many leading banks have secured additional financing through rights issues. Continued share price declines have made each form of financing exceptionally problematic. Institutional investors are nursing major losses, thereby dulling enthusiasm for further issuance. 8 The limits of central bank capacity and the reticence of traditional institutional shareholders have necessitated the search for new sources of funding.

The most promising, if controversial, derives from Sovereign Wealth Funds. These state-backed asset management pools have become pivotal actors in the provision of the liquidity to minimise the solvency dilemma posed by declared cumulative losses of more than US$320 billion across the global banking sector. Sovereign Wealth Funds invested US$24.8 billion in the first two months of 2008,

Causes and What to Do About It’ (Speech delivered at Alliance of Liberals and Democrats for Europe, Brussels, 27 February 2008); for United Kingdom, see R Lomax, ‘The State of the Economy’ (Speech delivered at the Institute of Economic Affairs, London, 26 February 2008).


Lomax, above n 3 at 5.


A Greenspan, ‘We Will Never Have a Perfect Model of Risk’, Financial Times (London), 17 March 2008, 13; for scathing critique of Greenspan’s tenure at the Federal Reserve, see Morris, above n 2.


Geithner, above n 3.

7 The most stringent criticism in this regard has come from a former chairman of the Federal Reserve itself. See P Volcker (Speech delivered at 101st Meeting of Economic Club of New York, New York City, 10 April 2008). He argued that the erosion of trust and replacement of relational with transactional imperatives created a crisis of such magnitude that ‘the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long embedded central banking principles and practices’: at 2.

8 R Wachman, ‘HBOS 4bn Rights Issue is Massive Flop’, The Observer (London), 20 July 2008, B1; P Thal Larsen, C Hughes and D Shellock, ‘Banks’ Cash Calls Shunned’, Financial Times (London) 19 July 2008, 1.


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