Table of Contents

The Financial Crisis and the Regulation of Finance

The Financial Crisis and the Regulation of Finance

Edited by Christopher J. Green, Eric J. Pentecost and Tom Weyman-Jones

The 2007–08 financial crisis has posed substantial challenges for bankers, economists and regulators: was it preventable, and how can such crises be avoided in future? This book addresses these questions. The Financial Crisis and the Regulation of Finance includes a comprehensive overview of the crisis and reviews the theory and practise of regulation in the UK and worldwide. The contributors – all international experts on financial markets and regulation – provide perspectives and analysis on macro-prudential regulation, the regulation of financial firms, and the role of shareholders and disclosure.

Chapter 2: ‘The Day the Music Died’: The Financial Tsunami of 2007–09

Christopher J. Green

Subjects: economics and finance, financial economics and regulation, money and banking


Christopher J. Green1 THE MUSICAL CHAIRS THEORY OF MARKETS ‘We all got up to dance, Oh, but we never got the chance! ’cause the players tried to take the field; The marching band refused to yield. Do you recall what was revealed The day the music died?’ Don Maclean, American Pie Interviewed by the Financial Times on 9 July 2007, the chief executive officer (CEO) of Citigroup, Chuck Prince, told the newspaper that he ‘. . . dismissed fears that the music was about to stop for the cheap credit-fuelled buy-out boom . . . [He said] that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market. “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” ’2 We all know what happened next, even if the details are fading. Four months later, Citigroup reported a fourth quarter loss of US$9.8 billion including an $18.1 billion write-down, mainly on sub-prime mortgagebacked securities, and Chuck Prince resigned as CEO.3 Twelve months later Citigroup was part-nationalised as it entered into an agreement with the US government which guaranteed up to $306 billion in problematic assets and injected $20 billion of public capital into Citigroup ‘.  .  . to restore confidence in a bank that defines the term “too big to fail” ’.4 The chapters in this volume are all concerned in...

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