It is perfectly reasonable to feel angry about the whole situation. This anger was then translated to and reflected in the political will to sanitize banking and finance. Too many people have been burnt and too much government money has been poured into the system to keep the wheels from really coming off.

During those few days in September 2008, baring in mind it was just over a year ago, it was impossible to describe the level of uncertainty that existed in the world of banking and finance. The failure of Lehman Brothers, in terms of scale and consequences was unprecedented. The world financial system was so close to collapsing it was scary to even think about. The global financial market is a very inter-connected place.

Some people would describe it like a giant domino set:

First it was the sub-prime lenders.

Then it was the Bear Sterns hedge funds investing in sub-prime RMBS and CDOs of ABS.

The problem next infected the UK, when there was a run on Northern Rock, a mortgage lender which heavily relied on short-term funding.

A wave of losses was announced by bank across the world, all related to sub-prime, RMBS and related securities.

Monoline insurers, those who provide guarantee to debts, including ABS, were next - their credit ratings were cut owing to them guaranteeing sub-prime RMBS which now look like many will default, which means they would suffer heavily losses.

Then it was followed by Bear Sterns itself, which was acquired by JPMorgan Chase at a very cheap price.

The problems continued to spread - next were two US federal sponsored agencies Fannie Mae and Freddie Mac, provider and guarantor of over US$5 trillion of home loans, were rescued by the US government.

Rumors on the amount of exposure Lehman Brothers had to sub-prime RMBS and ABS CDOs wildly circulated the markets, pushing down its share price, along with stocks of nearly every major banking institution around the world.

Lehman then collapsed, and fear spread to other Wall Street institutions.

Who could be next? Morgan Stanley? Goldman Sachs? Citi?

AIG, at one point the largest insurer in the world, was rescued by the US government, after having provided protection on sub-prime RMBS and ABS CDOs via credit default swaps.

Lloyds TSB Group in the UK bought HBOS Group, after a run on HBOS’ shares.

Washington Mutual, a large mortgage provider in the US was closed down and sold to JPMorgan Chase.

Fortis, a Belgian-Dutch banking and insurance group was part nationalized.

Icelandic banks began to have problems and the government took control of Glitnir, the third largest bank in the country.

Dexia, a French-Belgian was bailed out by Belgian, French and Luxembourg governments.

Another former UK building society, Bradford and Bingley was nationalized and then sold to Spain’s Banco Santander.

Hypo Real Estate of Germany was bailed out with the help from the German government.

Then Iceland took control of Landsbanki, the country’s second largest bank.

Three of UK’s largest banking groups (Lloyds TSB, RBS and HBOS) had government money pumped into them to shore them up.

Later on, Citigroup was rescued by the US government. The list went on and on.

Owing the financial crisis and the number of large institutions involved, governments saw no alternatives but to get directly involved to bail them out. National governments have never had such high level of involvement in the private finance in the Western world. There were claims that markets have failed and capitalism was about to implode.

The anger displayed by the public and politicians was keenly expressed by anyone who has an opinion. The basic message was: bankers are evil-doers and banks are unworthy institutions and they should all be punished for their sins. Bankers became the butt of many cruel jokes. It really did not matter whether those accusations were justified or not as bankers were such easy targets. However, it should be point out for every problem that was blamed on ‘bankers’, another culprit has been conveniently hidden away.

There are no doubts that many of the problems the financial services industry faced (and still facing) were caused by a selected group of bankers. Those who wrongfully earned massive bonuses in years past by creating and stuffing theirs and other firms’ balance sheets full of horribly misconceived assets. On the other hand, as demonstrated earlier, it took a whole chain of people to create the toxic assets that plagued the banks, many of these people were/are not bankers.

Additionally, for every banker who was involved in creating complex securitized assets, there are many more who are doing a honest job of making a living in banking. It is harsh to punish these honest folks just because their employers are banks or financial institutions. It is similar to concluding a particular sport is boring because you just happened to have watched a boring match. How about all those who participated in the creation of these toxic assets? They seem to have gotten off the hook.

As the financial crisis developed, and as various government because more involved than even in the financial markets, certain ideas were being considered and then implemented which were contradictory. For example: By the time the UK government injected capital into or rescued various UK banks, the ‘credit crunch’ has been in full swing for a number of months, as a result, the government sought commitment from the banks to increase lending to companies and individuals. At the same time, the government, UK Treasury, the Bank of England and the Financial Services Authority all asked the banks to increase their capital ratios. There are two ways to improve capital ratios. One way is to issue new shares, but with share prices at rock bottom no bank will attempt such a route. The second is to reduce balance sheet by reduce lending or simply not extend any more credit. I trust you can see where the contradiction arises. At a later date, the UK government again urged the banks to lend more to companies to try to lift the UK economy out of recession. However, as any prudent risk manager will tell you that committing any lending during a recession, when the companies’ cash flows are uncertain, is not the most sensible thing to do. Again, politicians were making politically popular noises without considering business realities.

The last time a democratic government interfered with banking practices was the South Koreans back in the 1980s and 1990s as the country tried to boost industrial output and grow the economy. As a result, banks lent to companies that they thought the government would like them to lend to, rather than based on principles of economics, risk management and good business practice. The result was a massive banking failure which required the government to rescue a number of large banks. Prior to that, there was something called communism which, in a number of countries and over a number of decades, directed state-owned banks to lend to state-owned businesses. The eventual economic collapse in several countries was a good warning to current politicians.