“Could 2008 Happen Again?”

Yves here. Due to having closely chronicled the 2007-2008 crisis, and then learning even more afterward by continuing to dig into what happened, yours truly has a strong point of view about what happened. In his post below, Richard Murphy correctly points out that private debt excesses and not public debt, are what triggers financial crises. He points to a strong parallel to the runup to the crisis, that of widespread overvaluation of real estate. Recall that William White and Claudio Borio of the Bank of International Settlements were sounding warnings starting in 2003 about frothy residential real estate prices in many markets, particularly in the Anglosphere.

However, the reason no one anticipated the near collapse of the global financial system in September 2008 was that that was not a real estate bubble implosion but a derivatives crisis. As we explained long-form in ECONNED, the use of a statistical arbitrage strategy led to the creation of CDOs whose assets were primarily credit default swaps referencing particularly rancid tranches of subprime mortgage bonds (the inclusion of ~20% of securities, as opposed to CDS, greatly increased the market for these CDOs). This structure was extremely leveraged and in and of itself drove the demand for >50% of subprime mortgage bond origination during the so-called toxic phase of the subprime mortgage lending.

More generally, the use of credit default swaps created risk exposures greatly in excess of the value of subprime mortgage bonds. Most experts estimate the derivative wagers were 4-6 times the value of real economy exposures.

And as we further explained in ECONNED, those CDO and CDS exposures wound up disproportionately at systemically important, undercapitalized financial institutions.

So we are not disputing Murphy’s thesis that a crisis of some sort looks likely, and will become even more so with no course correction. However, what made 2008 distinctive, in a bad way, was the degree of gearing, as in leverage on leverage. Consider the impact of the CDO strategy we sketched out above:

If you look at the non-synthetic [non-CDS] component, every dollar in mezz ABS CDO equity that funded cash bonds created $533 dollars of subprime demand.

And there were other market-goosing effects, such as artificially lowering credit spreads (finance speak for making subprime mortgage loans cheaper than they would otherwise have been).

However, the unwind of a mere real estate bubble can be pretty bad, as the example of Japan and the US S&L crisis demonstrate.¹ And unlike 2007-2008, where many expert observers such as the Bank of England, were warning of the dangers of credit default swaps, CDOs, as well as the position of roughly sixteen “systemically important” institutions, there is much less understanding of where leverage on leverage bombs lurk today.²

So if the debt-bomb is largely real estate and the scale is destructively large, the most likely result is zombification rather than a meltdown.

But an open question is whether a big unwind in such an economically important sector as real estate will trigger the explosion (or perhaps more accurately, implosion) of leverage-on-leverage plays, greatly amplifying the damage and potentially blowing back to the systemically critical payments system. One area of known leverage on leverage, although no one has a good grasp of the severity, is in private equity and private debt funds. For instance (as we decried when we first learned of the practice), private equity firms are not only borrowing heavily at the level of the companies in their funds. Many, if not most, now use “subscription lines of credit,” which allows them to borrow at the fund level with the unused commitments of the limited partners as the collateral. A 2025 note by law firm Mayer Brown confirms that credit funds are similarly engaging in fund level borrowing.

Crypto is another possible venue for leverage on leverage. The crypto-valuation plunge in late 2022 led to the collapse of Silvergate Bank, whose “deposits” were 98% crypto, and had also engaged in lending against crypto holdings. But I have yet to see a good decomposition of the role of the lending by Silvergate as opposed to merely a traditional bank run in its demise. US regulators have been making some attempts to make sure that stablecoins are properly backed by real assets, which largely undermines the attraction of being in that business at all. Another big crypto worry is that proposed rules put no limits on rehypothecation, while there are strict limits for US securities. Rehypothecation means that the collateral a customer posted for a loan can be repledged by the lender to obtain another loan. The fact that the UK did not have limits on rehypothecation and Lehman exploited that amplified the damage done by Lehman’s demise.³

These actual and potential bubbles are growing even as the growth prospects in the Collective West are poor. The UK faces a food crisis this winter. Budget crises are underway or loom in much of Europe due to the economic drag of Russia-sanctions-induced high energy prices, which will be made worse by US tariffs, running into the perceived imperative of greatly increased military spending. In China, as we have discussed, the government is seeking to tamp down an overproduction crisis, which is deflationary. Deflation makes debt overhangs even worse, since prices, particularly for labor falls while the value of borrowings and interest payments do not. Whether China will succeed is an open question. but we do see price anecdata that China is exporting deflation to Southeast Asia.

Note that Murphy had a second post, Could 2008 happen again? Part 2, describing frothy real estate lending in the UK.

By Richard Murphy, a chartered accountant and a political economist who has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK.

This is from the FT this morning:

Almost three-quarters of HSBC’s Hong Kong commercial property loan book was flashing warning signs by the end of June, as a prolonged slump in retail spending and sluggish demand for office space weighed on Europe’s largest bank.

HSBC is Hong Kong’s largest lender and the territory is the single largest source of income for the bank by geography. HSBC has made $32bn of commercial real estate loans in the territory, out of a $234bn Hong Kong loanbook.

Why flag this particular article on a morning when there is so much else that is going so wrong in the world? My reason is to highlight the fact that whilst the world’s media obsesses about government debt, there is, quietly, but undoubtedly inevitably, a growing debt crisis developing in the world banking systems.

Throughout the world, vast quantities of bank lending are secured on domestic and commercial properties. In other words, banks make loans because they can place mortgages over properties that they believe they can sell in the event of their customer defaulting, thereby providing them with the security to make the loan that the customer in question wants, whether that is to buy the property in question or not. This is, of course, how the domestic mortgage market works. It is also how much of commercial bank lending works.

The reason for highlighting what is happening to HSBC in Hong Kong is that the basic assumption made by all bankers worldwide  — that property is their security — is something that can go horribly wrong. It did, of course, in the US domestic mortgage market in 2008, and the global financial crisis followed as a consequence. There is every reason to think that this might happen again.

In Hong Kong, the risk arises because there has been a collapse in the rental market in that territory, with the FT noting that rents have fallen by approximately 20 per cent since 2022, whilst the vacancy rate is running at something like 19 per cent, meaning that the properties in question are earning nothing at all.

Elsewhere, the risks differ. For example, in the UK, where approximately 85 per cent of all loans by banks are secured by mortgages, the most significant overall risk comes from the uninsurability of many properties in the future because of the risk that they might be flooded by rising seawater levels. This is true for many domestic properties. However, the problem might be even bigger in the commercial sector. It is thought that up to 80% of all commercial bank loan portfolios are secured on properties that might be subject to this risk. Just look at the flood risk map for central London and you will see precisely why this is the case.

The point I am making, therefore, is a straightforward one. Whilst politicians, neoliberal commentators, the mainstream media, and others wish us to be distracted by the supposed risk that government debt poses to us, and to our grandchildren – the lucky ones of whom will inherit a share of it – the real likely debt risk that will create the next global financial crisis is almost certainly already on the balance sheet of most of the world’s major bankers. That is because it is represented by overvalued property where the chance of loan repayment is low precisely because the properties in question will, at some point in the not too distant future, become unsaleable, either because of changes in the market demand for property within the commercial sector, or because flood risks will mean that the buildings in question will be uninsurable, creating a crisis for the banks because the security that they have for their lending will no longer be of any value.

To put this another way, the assumption that 2008 could not happen again is wrong. It could, because the next global financial crisis might well be precipitated by overvalued bank balance sheets, as was the case in 2008, even if the precise reasons for the overvaluation might change.

Bankers never, it seems, learn, and as fools in charge of money, they appear to be all too readily parted from it. We will, of course, all end up eventually paying the price for that.

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¹ The reason the damage from the S&L crisis was not as severe as most anticipated was that Greenspan was able to engineer a very steep yield curve, with cheap short-term rates but hefty intermediate and long-term yields. So banks were able to rebuild their balance sheets much faster than anticipated by engaging in simple-minded, traditional “borrow short, lend long” practices.

² We fiercely criticized Geithner, Paulson, and Bernanke at the time for not hauling the big players into a room and demanding that they ‘fess of about their CDOs and CDS positions and who the “protection writers” were. That might, for instance, given them an earlier warning of the critical position of AIG and the monoline insurers (the latter did not come into focus until early 2008).

³From Financial News:

Rehypothecation is a procedure by which one bank lends securities that its clients have pledged as collateral. In the US, rehypothecation is capped to a certain amount of a customer’s assets, but in Europe there is no such cap.

Two years ago this week, hedge fund managers discovered that assets they had posted as collateral with their prime broker were stuck somewhere within Lehman Brothers. Many of these managers had not even been using Lehman as their prime broker.

The assets wound up in Lehman through rehypothecation, often without the hedge fund managers’ knowledge. With some of their portfolio assets frozen in the collapsed US bank, the hedge fund managers had to work hard to maintain liquidity in their funds, a need that was particularly acute since, separately, many investors in hedge funds were seeking their money back.