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HOW IT ALL WENT PETE TONG BY GERAINT EVANS

A few years ago, various cunning merchant bankers were sitting around wondering how they could make themselves even richer. In the low interest environment at the time, there was an abundance of cash to be lent out but a lack of obvious people to lend it to. But bankers like lending cash because that's how they make money, so they started looking around, and they spied a vast amount of poor Americans who hadn't been allowed loans before because they probably wouldn't be able to pay them back.

Still, bankers like to think outside the box so they employed predatory mortgage lenders to offer these poor Yanks the chance of owning their first pad. Soon millions of poor Americans "owned" homes they couldn't afford. Bankers then bundled these dreadful loans with better ones and sold them on to other banks and funds, raking in huge bonuses for having created a new market that generated loads of fees and commission.

As interest rates began to rise, Hank and Mary-Lou's excitement at having left the trailer park quickly turned sour and they began defaulting on their mortgage payments. Suddenly, the heavily traded loans backed by these dreadful mortgages were shown to be worthless, but by then more than a trillion dollars worth had infected all parts of the financial system. The complexity of these mortgage-backed securities and the traditional secrecy of banks ensured the banks didn't know the extent of each other's exposure and so, fearing bankruptcies, they stopped lending to one another. And the expression was born - the credit crunch.

Things might have been vaguely OK if the regulators had acted decisively but instead they faffed around like a bunch of old ladies. Before you knew it [August 2007] we had the first run on a British bank, Northern Rock, for 150 years and other investment banks, such as Bear Stearns, lost the market's confidence too. (It was later sold to JPMorganChase at $10 per share).

THE EXPERTS GET IT WRONG...AGAIN

Although industry "experts" declared in mid-2008 that the worst of the credit crunch was over, the law of unexpected consequences has ensured a regular supply of further trauma. The forced nationalisation of US mortgage giants Fannie Mae and Freddie Mac in September 2008 was swiftly followed by the fall of America's fourth largest investment bank, Lehman Brothers, the takeover of Merrill Lynch by Bank of America, and the majority nationalisation of American insurance behemoth AIG. This was followed by the UK government-brokered takeover of high street bank HBOS by Lloyds TSB, and a collapse in the market value of financial firms across the world that was so scary some felt that capitalism might be coming to an end.

MORE BAILOUTS

Of course, all those tossers who demanded "light touch" regulation when the good times rolled have since been crying out for government action to save their sorry arses. Luckily for them, the US authorities announced a $700 billion bailout designed to bring onto its books the "toxic" assets associated with the sub-prime mortgage debacle and bring back to life the frozen credit markets. When Congress initially rejected the President's Troubled Assets Relief Programme, stock markets went into freefall. Fortunately, US politicians got their act together and passed it. Meanwhile, restrictions on short selling were announced in America and Britain.

CONFIDENCE IS EVERYTHING

With hindsight, it was the US authorities' decision to allow Lehman to go bust that meant things became really scary, as a domino effect began with other firms worrying about their peers' exposure to the failed bank. Before you knew it, the banks had no confidence in each other and withdrew their better priced products; companies faced insolvency due to the high borrowing costs and quickly a global recession began. When former Chairman of the Federal Reserve Alan Greenspan says we're experiencing a "once in a century type of event" you've got to ask yourself one question: what now?

CITY BOY FORECASTS...

Here goes: I think we're f***ed to use the technical term for the next 2 years [until end 2010]. In the UK we have high levels of personal debt, a disproportionate economic reliance on the financial services industry and have just experienced a housing bubble that is exploding. Combine these elements with a global recession and I think we can safely say that if you're thinking of buying a flash motor, don't.

Indeed, I predict that 2009 will be depressing for us all. Like Woolworths, other firms will fail as consumer spending drops. Retailers, restaurants, clubs and pubs will all suffer as we enter a vicious cycle caused by rising unemployment. If the past decade was a party, then I'd compare the next few years to one of those hangovers that gets worse before it gets better.

And the City will never be the same again. Up to 100,000 jobs may be lost out of 340,000 and bonuses this year are down 60 per cent on average. There will be tighter regulation and greater transparency, while shareholder pressure should help ensure that the bonus culture that was the cause of all the woe is modified to make City boys think less recklessly. Well, here's hoping. END