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| From dotcom bust to banking meltdown: the decade in business It was a decade that did very little to enhance the reputation of capitalism and big businessOn 15 September 2008, workers began to stream from the offices of the Lehman Brothers building just north of Times Square. One yelled to the press camped outside: "You're watching history, man" – and he couldn't have been more right, as the investment bank collapsed, triggering a banking crisis the likes of which had never been seen.It was a tumultuous decade bookended by two terrible crashes, the first brought on by the bursting of the dotcom bubble and the second by a financial crisis still yet to fully play out.At first glance, both look very different. But each shared some familiar characteristics: rampant speculation and the hope of getting rich quick caused too much money to be thrown at too many unlikely bets, whether it was an internet start-up that had no chance of reaching profit, or paper assets backed by low-income families in the United States who never had any hope of repaying the mortgages that greedy brokers had persuaded them to take out. They were twin asset bubbles, the first on the stock market, the second around property."We had two spells of new age thinking," says Mark Casson, professor of economics at the University of Reading. Both were fostered by the idea, he says, that normal rules of economics and accountancy, such as making a profit or managing risk, did not apply. "In most crises, historically, some new industry develops and people begin to think they are living in a new age with new economic laws – the old ones can be dispensed with because they would inhibit growth. But it is the same mirage over and again."It was also a decade that would radically change lives and the way business is done forever. The explosion of mass communications in spite of that first internet boom and bust; the emergence of China and India as economic powers and the appearance of up to a billion new consumers; the acceleration of globalisation and the benign deflationary effect that would have, lowering prices in the west, and the subsequent sharpening of global competition that has driven huge mergers and acquisitions, as businesses seek to lower costs in order to survive, with the result that many famous British names have fallen to foreign owners over the past 10 years. In addition, the euro was introduced across Europe in 2002 and thrusting ambition drove the world's leading cities to compete over who could build the most impressive towers.But it was also a decade that did very little to enhance the reputation of capitalism and big business, with a rogues' gallery that included unscrupulous Wall Street analysts who cheered on internet businesses in public that they derided in private; the fraudsters from Enron, WorldCom, Tyco; and others who were beguiled by celebrity, rising share prices and the promise of extravagant reward as offered by the likes of Bernie Madoff. Other unpopular figures included the private equity firms and hedge fund managers who appeared to enrich themselves at the expense of the ordinary worker; the "Phoenix Four" who made millions from MG Rover despite the business failing, and the highly paid and reckless bankers who pitched the world into recession and still demanded their bonuses be paid.Front page newsBusiness news became front page news with "hedge funds", "credit crunch", "sub-prime", "CDOs", "Ponzi scheme" and even "Libor" working their way through the Today programme on Radio 4 and into dinner party conversations.The decade began with what appeared to be a sublime piece of timing. The FTSE 100, which had risen amid the froth of the internet boom, reached its peak on 30 December 1999. Less than two weeks into the millennium, a deal was struck that seemed to confirm the ascendency of the new economy – the merger of AOL with Time Warner, which put the internet business firmly in the driving seat.But it turned out the boom had been built on sand, and it was this deal that drew a line in it. The AOL model, charging users for dial-up access and a walled garden of content, rapidly lost its relevance as the web evolved. In May this year,Time Warner announced plans to spin AOL off into a separate company. Its value had plunged from $200bn to $3bn.If many of the first wave of businesses seeking to exploit the internet in the late-1990s had faltered, the web only became more deeply entrenched in consumers' lives, largely thanks to the spread of broadband. Unprecedented power was handed to the consumer and new companies would continue to emerge. Where the online fashion retailer Boo.com crashed to earth in 2000, Asos has proved to be one of the most successful companies during the closing years of the decade.Some of the biggest corporate names on the planet were unheard of in 2000. Google was incorporated by Larry Page and Sergey Brin from a Stanford University dorm room in September 1998 and in 2000 had revenues of $19m (£12m) – last year, it had revenues of $21.8bn. MySpace was set up in 2003 and Facebook became available to the wider public in September 2006 after initially being limited to Harvard students. YouTube went live in February 2005 and was bought by Google for $1.65bn 18 months later.In October this year, shares in Amazon finally rose above the peak they had hit in the dotcom boom, this time on the back of solid and growing profits. "The explosion of global communications is a massive mega-trend," says Joe Nellis, professor of international management economics at Cranfield School of Management. "Everyone on the planet can talk to each other for the first time in history We can't possibly know how this will impact us because it hasn't happened before. It is a whole new universe."Forbes magazine chose another technology boss as its chief executive of the decade. Apple founder Steve Jobs returned to the company in 1997 and by 2000 had begun to turn it around after several years of heavy losses. In October 2001, Apple launched the iPod, a product that would return it to centre stage. Then came the iPhone in 2007, to underscore its revival. At the start of the decade, it had profits of $600m and sales of $6bn. Last year the business made profits of $5.7bn on sales of $36.5bn.In Britain it was equally hard to ignore the phenomenal rise of Tesco. The third largest retailer in the world and present in 13 countries, its profits rose from £930m in 2000 to about £3bn in 2009.ChicaneryWhen the tide of the dotcom boom receded, it exposed an unprecedented underbelly of fraud and fudged accounting that had accelerated in the dying days of the bubble as bosses struggled to meet the growth targets to which investors had become accustomed.WorldCom, an American telecommunications firm, became the biggest bankruptcy in history in 2002, but it was Enron that became the byword for corporate chicanery and would go on to inspire a film, countless books and a successful West End musical.Enron had been a pedestrian gas pipelines business, but in the heady 1990s transformed itself into an energy trader, briefly becoming the seventh largest company in the US. As the firm began to run into trouble it hid debts in offshore companies and inflated its profits. When it finally went bust in 2001, it opened the floodgates on a lurid series of scandals. America was in the mood for revenge and Enron's leaders were found guilty on numerous counts. But former chief executive Kenneth Lay, who had been born into rural poverty and built a fortune of $400m, died of a heart attack before he was sentenced. Arthur Andersen, the firm's auditor, was forced out of business after being found guilty of obstruction of justice.The years that followed, notes Geoffrey Wood, of Cass Business School, were unusually good. "It was mostly a benign economic environment, with low inflation, low interest rates and steady growth … The falling price of goods kept interest rates down, encouraging people to take on higher risks to get greater returns – and then it all went wrong."During the days of easy borrowing, huge deals were done to build competitiveness on the global marketplace. British firms taken over during the decade by foreign buyers included P&O, Hamleys, Ben Sherman, Abbey National , ScottishPower and industrial gas group BOC. The fight for Cadbury continues. For the first time, Chinese and Indian companies were strutting the global stage. There was also the start of a scramble for commodities between emerging economies and the west.In 2006, bankers in the City collected £19bn in bonuses and stock markets were at six-year highs. In a sign of how overstretched we were all becoming, Abbey offered mortgages of five times salary.But the defining moments in business were to come in the latter years of the decade, although it is arguable which of the images might remain most resolutely in the mind – the queues snaking around Northern Rock in 2007, the boarded-up homes in the US that had been foreclosed, the Lehman Brothers workers leaving their offices, belongings stuffed in cardboard boxes, or even the closing down signs outside Woolworths, a British institution that had stumbled into bankruptcy amid the deepest and longest recession since the second world war. The excessive risk-taking and borrowing and the wrongheaded belief, yet again, that we had entered a new paradigm caused a huge implosion.The crisis had begun in 2007, as the housing market in the US cooled and interest rates began to rise. Many on the bottom rung found it difficult to meet mortgage repayments and by April one of the largest sub-prime lenders went under, sparking panic. Fear also spread as it became clear that much of that toxic debt had been packaged up and sold around the global banking system. New financial instruments had been intended to spread risk and insulate individual institutions; in fact it led to contagion. Credit dried up and it emerged that Northern Rock was forced to apply to the Bank of England for emergency funds. Banks around the world began writing off huge sums. Then in February 2008, Northern Rock was nationalised. The dominoes fell rapidly. Bear Stearns was bought by JP Morgan Chase for a song, house prices began falling at the fastest rate since 1991 and the US government seized control of Freddie Mac and Fannie Mae, the two firms that underpin the US mortgage market.But it was the failure of Lehman that plunged the world into crisis. That same day Merrill Lynch was rescued by Bank of America. Days later Lloyds bought HBOS amid fears it would have collapsed. Bradford & Bingley was nationalised. The government announced a £500bn package to shore up the banking system and is left owning large stakes in Lloyds and RBS. Bankers have become the new pariahs and fundamental questions are being asked about the gulf in pay between those at the top of society and the rest.PanicDramatic events would become commonplace, from the collapse of the Icelandic economy, a microcosm for the hubris of the decade, to the bankruptcy of General Motors, a move dripping with symbolism about the decline of the west.The impact of Lehman's failure was a sign of just how interconnected the world has become, says Nellis. "This decade has been the real beginning of globalisation; the capital flows have been immense and never has the world been so inter-dependent. We saw that with Lehmans. You pull one card out and panic breaks out around the world." Looking forward, he questions how firms will survive the exigencies of a global economy. "They have to be either incredibly efficient … or they have to be very niche. The worst place to be is stuck in the middle, and Woolworths is the perfect example. To some extent you could argue that is where the UK is."Casson suggests the pressures of globalisation have encouraged the excessive risk that heralded the financial crisis. During the decade, the entrepreneur in Britain had become a "political and ideological weapon to rejuvenate and reinvent the economy. It is a sound concept but we took the brakes off. It was the New Labour agenda. There was a perceived need to change everything, to focus on opportunity and ignore risk. There was an anxiety for rapid structural change to get Britain back to being an economic power," he says. "And we have embraced the idea that to force through change we must rely on ruthless, unscrupulous and selfish people to do it, even while we extol the virtues of corporate governance. We appoint chief executives on £3m who are ruthless, brutal and testosterone-fuelled and then pay £30,000 to a non-executive director who is expected to stop them doing anything antisocial."Britain survived the dotcom crash in relatively good shape, but as the decade closes it is the last of the G20 countries stuck in recession.Politicians now bend to the will of business, Casson adds. "The view has become that each country is just like a firm competing for a share of the global market and those that do best are favoured by bankers and entrepreneurs. Politicians are becoming salespeople, and bankers and multinationals, who control the flow of capital and are deciding where it will go, have become the masters of the universe. Politicians are bidding, in the same way they might bid for the Olympics or the World Cup. It has devalued political life."And we are then told that we have to accept what is good for us. But the hard evidence to back up a lot of this doesn't exist. The only real way to test whether bankers will pack up their things and go elsewhere is if we call their bluff. Over the next decade, we have to get back to the idea that quality of life and society are not worth sacrificing for coming out a winner in this economic game."Global economyRecessionCredit crunchLehman BrothersNorthern RockDavid Teatherguardian.co.uk © Guardian News & Media Limited 2009 | Use of this content is subject to our Terms & Conditions | More Feeds guardian.co.uk |
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Ancient map with China at the centre goes on show in the US A historic map of the world, with China at its centre, has gone on display at the Library of Congress in Washington. news.bbc.co.uk |
Karzai Faces New Woes The Afghan Parliament declared a recess Sunday after rejecting most of President Hamid Karzai's latest slate of cabinet nominees, in yet another blow against the president's authority. online.wsj.com |
Iceland's children paying for slump Public health experts have noticed signs of family breakdown in the wake of the 2008 financial meltdown that left most adults in serious debtDr Geir Gunnlaugsson, Iceland's director of public health, has no doubt who was worst affected by the economic crisis that gripped the country 15 months ago – children.There has been a surge in reports to child protection agencies tasked with monitoring everything from maltreatment to mental health and who have been on the alert for problems in the wake of the 2008 financial crisis."We believe that there have been increasing strains in intra-familial relations – conflicts among parents for example, but also pressures on family budgets – and that this in turn impacts on the children," said Gunnlaugsson.His worries are echoed by others. "It's mostly about their psychological welfare. The children have also asking: What is going on? What do we mean by the 'crisis'? What is going to happen?" said Professor Halldor Guðmundsson from the University of Iceland.The greatest concern of both experts is the impact that long-term joblessness will have on a younger generation that has never known anything other than near-zero unemployment."Some groups have now experienced one whole year of unemployment and it's a totally new experience for Icelandic society, so we will probably suffer the impact of that on the welfare and mental health of the population," said Gunnlaugsson.Against the backdrop of 8% unemployment and rising, fears are growing of mass emigration by the young, particularly to Scandanavia.HerdÃs Ólöf Kjartansdóttir, aged 23, a business studies degree student at the University of Iceland, said: "I think it's very hard to be graduating right now, so there is the possibility of major migration. A cousin of mine has already moved to Norway with her whole family – her parents, her two siblings, her boyfriend and her son. They have all got jobs there."But Guðmundsson said there were some positive signs. "Children are spending more time with their parents. There is less overtime, people are at home more because things have slowed down or because they are out of work."This situation is likely to worsen. A government scheme to prevent repossession of homes is due to end soon, threatening to cause widespread misery in a society saddled with huge levels of household debt.Already charities providing free food are busier, receiving a record number of requests for special assistance at Christmas. Aid from three of the biggest charities reached 10,000 people.The impact of the debt burden faced by the government threatens to erode Iceland's much envied Nordic-style welfare system.Between 15% and 20% of households are believed to be in serious debt trouble, to the extent that they will need government assistance.Even so, the financial crisis has benefited some. Reykjavik has seen a rise in the number of tourists from Britain as well as continental Europe taking advantage of the favourable exchange rate.Fashionable clothes stores in the city centre have begun stocking more home-produced products as imports become expensive.But amid the lunchtime throng of tourists and locals at Café Paris, a bar in Reykjavik's old town opposite the square where thousands of demonstrators gathered night after night for a week last year, a note of warning is sounded."If no one goes to jail for what happened in this country then you will see it going up in flames," said its manager, Arnor Bohic.A failure to have a reckoning for those largely blamed for bringing Iceland to its knees is one of the possible sparks some say could reignite a city at peace 12 months on from the Saucepan Revolution – so called because of the noise-inducing kitchenware brought along by protestors.For now, hopes are high that there will at least be a reckoning for Iceland's economic woes, if not from a "truth commission" due to report within weeks, then from a criminal investigation into the activities of the discredited financial oligarchs."Given the enormity of this situation and what happened and what is already visible about the behaviour of some, one would guess that is a very likely outcome that some people will be severely penalised or put to prison," predicted Iceland's finance minister Steingrimur Sigfusson.Inside his office, he sighed about the uncertainty the country now faces in the run-up to the referendum on 3 March triggered by President Ólafur Grimsson's rejection of a bill to pave the way for repaying £3.4bn owed to the British and Dutch governments following the collapse of the Icesave online bank."We succeeded in a lot of ways in 2009, and the outlook for 2010 was even better than we had expected, but the president's decision has put a question mark over what will happen next ," he said.IcelandGlobal recessionBen Quinnguardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds guardian.co.uk |