Inside the meeting that saved the world

ANDREW COYNE: How the seven richest nations went all in on a plan that brought the global economy back from the brink

Inside the meeting that saved the worldThe meeting was not going well.

On Friday, Oct. 10, 2008, finance ministers and central bankers from the Group of Seven leading industrial economies had gathered in Washington for their regular fall meeting. The circumstances, of course, were anything but routine. Four weeks after the collapse of Lehman Brothers, the 158-year-old Wall Street institution, the financial world was in a state of escalating panic. With banks toppling one after the other, stock markets in a death spiral, credit markets all but disabled, the meeting had taken on crucial significance.

Around the world, investors were looking to governments for salvation—only they could provide the kind of rock-solid assurances that might put a floor under the markets. A strong, united statement from the G7, and there was some hope of restoring sanity to the situation. A weak statement, or worse, a failure to agree, and the entire world financial system might well tip over the edge.

An hour into the meeting, failure looked the most likely option. Under the excruciating pressure of the moment, normally cautious, buttoned-down politicians and civil servants were pouring out their emotions: their anger at things having deteriorated to this point, their fears at what might follow. The exchanges were punishing and direct. They were staring into the abyss, and they knew it.

Now the German finance minister, Peer Steinbrück, had the floor. A brusque, combative Social Democrat, he was the dean of G7 finance ministers, having been in the job since 2005. Though his English was excellent, when he wished to make a point with special vehemence, he spoke in his native tongue. And he was speaking in German now, great, angry torrents of it, as the other ministers struggled to follow the simultaneous translation. Hadn’t he told them all it would come to this? Hadn’t he said this at one meeting, demanded that at another? On and on he raged, for a good 10 minutes. You didn’t need a translator to know that he was in no mood to compromise.

At least one of those present, listening to this tirade, began to take off his headphones. If the Germans weren’t going to come to the table, there was no point. Best to start planning for the fallout . . .

And yet, improbably, the meeting ended in success. The G7 emerged united, issuing an extraordinary one-page statement pledging to stand behind their banks, whatever the cost. In time, it would prove to be the turning point in the crisis—“the beginning of the end,” in Bank of Canada governor Mark Carney’s unequivocal assessment. But it was a near thing. “It was intense,” Finance Minister Jim Flaherty recalls. Everyone there knew that “if this meeting was not successful, the consequences would be severe.”

The story of that remarkable meeting, its near failure and eventual triumph, is a vivid reminder of the importance of the human factor in history. Just as the panic had hinged, at critical moments, on human emotions—fear, mistrust, resentment, envy—so would the response. Not only would the G7 ministers have to overcome their own doubts and divisions, they would have to communicate their new-found resolve in a way the financial world could trust and take heart in. To get to that point, however, required policy-makers to go through a daunting journey of awareness, as they grappled with a constantly mutating crisis that seemed to defy all remedy.

It began, as everybody now knows, in the U.S. housing market. A combination of factors—too-easy monetary policy on the part of the U.S. Federal Reserve; federal regulations requiring banks to make more mortgages available to lower-income borrowers; massive purchases of those same mortgages by the hybrid public-private entities known as Fannie Mae and Freddie Mac—had conspired to drive U.S. housing prices to absurd levels. From 1999 to the bubble’s peak in 2006, the price of the average U.S. house more than doubled.

A notable contribution came from the aggressive expansion of lenders specializing in so-called “subprime” mortgages to borrowers with poor credit ratings, concentrated in the Sunbelt states of Florida, Arizona and California. These loans were then bundled up and combined with more secure forms of debt in complex investment instruments known as collateralized debt obligations (CDOs), to be sold on credit markets worldwide—a process known as securitization.

Theoretically, pooling individual mortgages and selling shares to large numbers of buyers was supposed to spread the risk of these loans. In reality, the complexity of the securitized instruments made it difficult for even the most sophisticated investors to understand exactly what they were purchasing. Yet with interest rates at such low levels, financial institutions had few qualms about plunging into debt to buy CDOs, with their seemingly attractive combination of low risk—signified by the AAA ratings the credit agencies awarded them­­—and high returns.

Investment banks in particular, unencumbered by the sorts of prudential regulations attached to deposit-taking banks, placed especially large bets on CDOs. Compensation packages encouraged it, and their risk assessment models seemed to tolerate it. But for the commercial banks it was an attractive proposition as well, since regulations allowed them to set aside far less capital against these mortgage-backed securities than would be required for the mortgages themselves. And to the extent they had any concerns about the risks they were taking on, these could be assuaged by the purchase of a form of insurance, known as credit-default swaps.

So long as house prices kept climbing, the whole rickety structure of collateralized debt could continue to grow. But easy credit was starting to heat up inflation. Through 2005 and 2006, central banks began to ratchet up interest rates in response. Low-income homeowners who had been enticed to buy via adjustable rate mortgages—low at first, but with a risk of revaluation later—suddenly found themselves in over their heads. Defaults multiplied. Housing prices began to fall, and fall, as increasing numbers of mortgage-holders simply walked away from houses that were now worth less than the remaining value of the mortgage.

The first signs of distress in credit markets began to emerge in early 2007, with the collapse of several subprime lenders. When New Century Financial Corp., the largest subprime lender of all, declared bankruptcy in April, the rout was on. Ratings agencies began hastily downgrading subprime-related securities. Investors, including Freddie Mac, stopped buying. In June, Bear Stearns, the fifth-largest U.S. investment bank, announced it would no longer let investors take their money out of two hedge funds that were heavily into subprime securities.

With a similar move by France’s BNP Paribas in August, the crisis burst into the open. The problem was not just that the assets in its funds had dropped in value: it had become impossible even to put a price on them. There had been, said the bank, “a complete evaporation of liquidity” in the market for subprime assets. Translated: other financial institutions were simply refusing to deal with them. Suspicion and rumour had stepped in where data was absent. Soon all became suspect—banks that owned subprime investments, or that were suspected of owning them, or that even dealt with others who owned them­.

At about the same time the Canadian market for (non-bank) asset-backed commercial paper (ABCP) locked up. As it happened, these were not backed by subprime mortgages—indeed, it later emerged they weren’t backed by much of anything—but who knew? They were so opaque, it was impossible to tell. “When you looked into the structure of the facilities, the leverage and complexity was jaw-dropping,” Carney says.

That gave the Canadian authorities an early tip to the broader nature of the crisis. “We had a sense that things were worse than others realized,” Carney says. “It was well beyond subprime, and could extend to all synthetic structured products.” It was the first sign of what was to become a systemic breakdown in the links of trust­—for what else is credit?—on which financial markets depend.

This chart chronicles the debacle. It shows the difference between the interest rate that banks charge each other, known as the LIBOR (London Inter-Bank Offered Rate), and the rate for three-month U.S. Treasury bills. The “TED spread,” as it’s known, measures the risk premium banks attach to each other as borrowers: or in other words, how frightened credit markets are. From a stable 25 basis points or so before the crisis hit, the spread had already widened to 43 points on Aug. 7, 2007. Within a few days, it had shot up to more than 250 points.

The problem now had everyone’s attention. Flaherty remembers being called at home by Henry “Hank” Paulson, the U.S. treasury secretary, warning “we have a serious problem with subprime mortgages in the United States, we have a major credit issue. And I remember well because I said to my wife, ‘well I’m going back to Ottawa.’ ”

The course ahead seemed straightforward enough. If liquidity was drying up­­, the textbook central bank response was to flood the market with liquidity. Meanwhile, financial institutions were to take writedowns and work to shed problem assets from their balance sheets. Central banks did their part: between August 2007 and January 2008 the U.S. Federal Reserve cut its benchmark federal funds rate five times, from 5.25 per cent to three per cent.

On Wall Street, meanwhile, the feeling was that the problem was well in hand. “In the fall of 2007, listening to CEOs on Wall Street, the constant refrain was: ‘We have a six-month problem, we’ll be out of this in six months,’ ” Flaherty recalls. On Oct. 9, 2007, the Dow Jones reached a new all-time high, at 14,165.

Even the run on Britain’s Northern Rock bank in September did not disturb the prevailing view that this was essentially a liquidity crunch. But unease persisted, for all the Fed’s prodigious efforts, as one institution after another—UBS, Merrill Lynch, Citi­group—unveiled huge subprime losses. Ominously, the “monoline” insurers, who were supposed to backstop losses on subprime securities, began announcing their own heavy losses. By early March 2008, Wall Street was abuzz with rumours that a major investment house was in trouble, sending the Dow plunging 1,000 points. Sure enough, on the weekend of March 15-16, Bear Stearns was taken over by JPMorgan Chase & Co. in a rescue operation backstopped by the Fed. The Fed also agreed to make loans available to investment banks for the first time, adding to the growing list of unconventional borrowers on its books.

Policy-makers began to sense they had misjudged the crisis, or at any rate that it had evolved. This was what made it so difficult to come to grips with, says a senior official in the Department of Finance: “It kept morphing from one thing to another thing.” Rather than a liquidity crunch, the new view was that the problem lay in a small number of institutions that had overloaded on bad assets. Still, the Bear Stearns rescue was viewed as a masterstroke: if it had not entirely stemmed the crisis, it at least provided the template for dealing with future cases as they arose.

Notably, Bear had not been “bailed out” with public funds. Even if the Fed had helped to midwife the deal, it could nevertheless be presented as a private sector solution. Bear’s shareholders certainly hadn’t been bailed out: their shares were now worth a small fraction of their previous value. To policy-makers, this was of prime importance. They were acutely aware of the dangers of “moral hazard,” the concern that, by rescuing financial players who had made reckless mistakes, they would simply encourage more of them. “I mean, normally governments don’t bail out investors for making bad decisions,” says the senior Finance official. “That’s not the way the system works.”

Again, it seemed the crisis had passed. Again, it proved a false dawn. In July, Indymac, another major subprime lender, was seized by regulators. Worse, Fannie Mae and Freddie Mac, with their $5-trillion mortgage inventory, were coming under strain. On July 13, the Fed announced it stood ready to make loans to them as well, if need be. But this was said to be only a precaution. There would be no bailout, Paulson insisted.

The situation continued to deteriorate through the summer. By September, there were clear signs that a new stage in the crisis was building. On Sept. 7, the announcement came: Fannie Mae and Freddie Mac would be taken over by the U.S. government. The hard line against bailouts had been breached. Everyone, even the agencies’ biggest creditors, was bailed out. Moral hazard, it seemed, was now acceptable. Or was it? What was the U.S. government’s policy?

Investors next turned their guns on Lehman Brothers. Paulson struggled to find a private buyer for the listing investment bank, canvassing both Barclays Bank and Bank of America, determined not to repeat the Fannie and Freddie debacle. When the books were opened, however, it soon became apparent there was a giant hole in Lehman’s balance sheet. Lehman’s CEO Richard Fuld had read the Bear Stearns rescue, correctly or incorrectly, as a sign the pressure was off. Though Lehman had reduced its leverage over the summer, it had not been nearly aggressive enough in selling its problem assets. In the end, no deal could be arranged: on Sept. 15, Lehman collapsed in a $600-billion heap, the largest bankruptcy filing in history.

It was a disaster, but one that might have had a silver lining, if it had re-established the no-bailout principle. Any hope of that was lost, however, in the chaos that followed. Merrill Lynch was already gone, forced into the arms of Bank of America that same weekend. A major money market fund manager, Reserve Management, was known to have invested heavily in Lehman Brothers’ commercial paper. Within two days it had suffered more than $40 billion in redemptions, rendering it effectively insolvent.

With Lehman’s assets frozen, hedge funds that had parked their securities with the firm began to panic. If Lehman was not safe, they asked, was anyone? They rushed to pull their securities from Lehman’s remaining rivals. Watching their asset base implode, Morgan Stanley and Goldman Sachs, the last independent investment banks still standing, prudently converted themselves into bank holding companies the following week.

The shock of the Lehman bankruptcy would also prove the undoing of AIG, the world’s largest insurer, already facing credit downgrades over its own massive bets on credit default swaps. Yet again, the U.S. government reversed course. AIG, like Fannie Mae and Freddie Mac before it, was judged too big to fail; in return for an $85-billion loan from the Fed, it was taken into government ownership. The effect was to sow further confusion: if a bailout was all right for AIG, why not Lehman?

It was clear that policy-makers had misjudged the crisis yet again. It wasn’t, as they had thought, a matter of a few over-leveraged institutions. Rather, the whole system (Canada excepted) was under-capitalized and over-leveraged—not just in the United States, but globally. Within the next few days, a series of financial institutions would be taken over, bailed out, nationalized, or shut down: Washington Mutual and Wachovia in the United States, Bradford and Bingley in the U.K., Fortis in the Netherlands, Hypo Real Estate in Germany. To many observers, it seemed the world was sliding into a repeat of the Great Depression.

To be managing a national economy in the middle of this maelstrom was to feel a strong sense of vertigo. “There’s no question­—it was close. There were some very scary moments,” the senior Finance official says. “It was just like the floor was falling out.”

To be sure, Canada’s banks had largely been spared. Yet Canadian policy-makers could hardly stand aloof from the carnage that was engulfing other countries’ financial systems. For one thing, there was real concern that Canada’s banks could be side-swiped in the panic. Moreover, as Flaherty remarks, “not all of our banks were equally strong. I won’t get into particular banks, but they were not equally strong.”

For Flaherty, it was an especially strange time, in the middle of a federal election campaign. “It was just surreal,” he says. He remembers “waving at cars at 6:30 in the morning” in his Whitby riding, then rushing over to the parking lot of a local furniture store to take “a conference call with Hank Paulson and the European finance ministers”—on his cellphone.

Canadian policy-makers were in close contact with their counterparts in other countries. “Every morning at seven, 7:30, we would have a G7 deputies conference call. On a really bad day there’d be another at the end of the day,” the senior Finance official recalls. Every dispatch seemed to bring news of fresh disasters. “It was so depressing. You’d get up and you’d read your BlackBerry and you just go, ‘Oh [expletive]. It’s going to be a bad, bad, day . . .’

“We have a finance counsellor in London. And he would have [already] sent me a report about what was happening in the London markets. One day it’s: ‘Liquidity has completely dried up. You can’t find it anywhere.’ The next day I’d open my email at six o’clock in the morning, and it’s: ‘Whatever liquidity there was yesterday has disappeared today!’”

For Carney, the phone calls often came in the middle of the night (or at other inopportune times: he recalls taking a particularly urgent call from Fed chairman Ben Bernanke while dandling an unhappy two-year-old on his knee). Yet for him, these were far from the worst days of the crisis. “At least it was out in the open,” he says. “The run-up to Lehman was almost worse, being eaten up inside knowing that things are on the edge, and people don’t know things are on the edge.

“There wasn’t a great strain, because you have something to do. You’ve got a series of situations to address, you’ve got a series of decisions to make . . . Being in battle, if you will, is liberating, because you can actually do something about it.”

Meanwhile, the situation internationally was spinning out of control. Too late, governments realized that they could not continue putting out one fire after another: they had to find a systemic solution. In the United States, Paulson unveiled the $700-billion Troubled Assets Relief Program (TARP), the aim of which was nothing less than to clean up the entire U.S. financial system’s balance sheets.

Others went even further: on Sept.30, Ireland, with its major banks near collapse, vowed to guarantee all bank deposits for a period of two years. But this only made matters worse for its neighbours: if Ireland was guaranteeing deposits, why leave your funds, say, in a British bank? When, on Oct. 8, Britain announced a $400-billion rescue plan for its own system, partially nationalizing eight banks and offering to prop up the rest, other European countries were likewise left scrambling.

Everything had been tried, it seemed, and nothing was working. The more heroic each country’s interventions, the worse the panic became. Not even a simultaneous cut in interest rates by all of the G7 central banks, a highly unusual move, seemed to have any effect. The week of Oct. 6-10, the Dow Jones fell more than 20 per cent, its worst weekly decline since the First World War. Credit markets had all but ceased to function: the TED spread had now widened to more than 400 points.

The crisis was in its 14th month. Governments had tried to deal with it in less drastic ways, but with the global financial system on the verge of imploding, there was no longer any doubt: what was needed was a coordinated, international effort, involving all of the world’s major economies. There would be time enough to worry about moral hazard: for now it was more critical to break the chain of bank failures. The G7 meeting that Friday would be the opportunity—perhaps the only opportunity. But did all of those in attendance know it?

The meeting began at 1 p.m., as usual, in the ornate splendour of the Cash Room at the Treasury Department. As hosts, the Americans spoke first. Paulson began with an overview of the situation as it stood in the United States, with special emphasis on how he proposed to implement the TARP plan. Opening the floor up to discussion, he invited everyone to speak frankly. He needn’t have bothered.

The discussion quickly erupted into an angry critique of American actions in the crisis, and the lack of a consistent approach to the bailout question. Bear had been saved, but not Lehman; Lehman had been allowed to fail, but not AIG. Sometimes creditors took a haircut; sometimes they had not. Far from reassuring markets, the seemingly random U.S. interventions had unnerved them.

The tone, says Flaherty, was “brutally frank. People said what they thought, and there was a lot of hostility toward the United States.”

The “general European view was that it was the fault of the United States that credit markets were in the terrible shape that they were in.” At one point someone handed around a simple chart, showing where credit markets were before the collapse of Lehman Brothers, and where they were after. If only the Americans had not been so stupid as to let Lehman fail, it was suggested, there would have been no crisis.

It wasn’t just the Americans that the Europeans were furious with. There was much bitterness at the British, too, for having “broken from the pack” earlier that week. The irony was not lost on some of those present. The Europeans were angry at the Americans for failing to bail out Lehman. And they were angry at the British for having bailed out their banks—though the Europeans had done the same, if in rather a more ad hoc way. It was unclear which they were more upset by: the inconsistency of the Americans or the consistency of the Brits.

For at least an hour things carried on this way. The G7 was a small group; its members had met often; they knew each other well. Perhaps that made for greater openness. Perhaps it made the accusations sting all the more. “There was strong anxiety expressed by some, some anger, some hostility, a couple of raised voices,” Flaherty recalls. “No one was screaming or anything like that. But it was clear everyone was anxious.”

Normally phlegmatic, at least in public, the ministers and central bankers shared their fears, should they fail to reach agreement on a plan. “None of us were sure that markets would even open on Monday,” Flaherty says. “This was a potential meltdown.”

Indeed, even as they were meeting, the markets were continuing their sickening slide. “We’re all looking at our BlackBerries, and the markets are still headed south,” the senior Finance official laughs, ruefully. “It’s not getting any better.” There was talk of the consequences of a financial collapse, even of “social disorder.” And there were moments of black humour. Steinbrück told of meeting a woman from the old East Germany, who said she had witnessed the fall of Communism, and now feared she was witnessing the fall of capitalism.

The Canadians were worried. The point of the meeting was to come out united, and united in support of a comprehensive bank guarantee. They had made some discreet attempts to forge a consensus going in. “There had been some helpful conversations and things done,” Carney recalls, “just in the run-up, in the corridor, just before, and it had been set up somewhat well.” But now all was bitterness and recriminations. “It looked like it wasn’t going to come together.”

Flaherty found the finger-pointing at the Americans unhelpful. Worse, the Europeans seemed genuinely to believe, not only that the crisis had started in the American banking system, but that that’s where it remained. The implication was that all they had to do was clean up their act, and all would be well. “This was avoiding the reality that, you know, a lot of European banks were leveraged at 30 to 1, 40 to 1, if not more.”

Carney rounded on them. Drawing on his expertise in capital markets—he worked at Goldman Sachs in London for many years before going into public service—he went over the trading statistics of the major European banks, pointing out that they were all trading at less than book value. The implication: the market thought their biggest banks were bankrupt. They weren’t, of course. But that had to be communicated in a way the markets would notice, and believe—that is, by an explicit state guarantee.

The Canadians were in an interesting position to make this point, given the strength of our banking system. We had no vested interest, as it were. We had not had to bail out any banks, nor were our banks likely to have need of any guarantee. Yet here we were, offering to provide one anyway, as part of a coordinated international effort.

Yet the Europeans had good reason to be concerned about the implications. It wasn’t just the moral hazard question, though that was troubling to everyone around the table. And it wasn’t just the costs to the taxpayer, though these were potentially enormous. It was also the political hazard of bailing out wealthy bankers for the costs of their own mistakes. They had seen the populist rebellion this had already ignited in the U.S. How much worse might things get in their own countries?

Steinbrück, in particular, felt exposed. Though a Social Democrat, he was proud of his reputation as a fiscal conservative. He had tried to minimize the taxpayers’ risk in this whole affair. He had already been burned by the banks’ failure to come clean on the size of their losses. And now he was supposed to give them a blank cheque? How was he going to explain that to his taxpayers?

The longer he spoke, the more hopeless it seemed. And then, just as he was finishing, everything changed. He was unhappy it had come to this, but it seemed he had no choice, if they were going to save the system. He would go along with the plan.

With that, any remaining resistance seemed to dissolve. Everybody had had their chance to vent. Now it was time to fix the problem. “Once the finger-pointing stopped,” Flaherty recalls, “sort of in the second hour of the meeting, people realized we need to create a plan. So that’s when it got more constructive.”

They began work on the statement they would release to the world afterward. Usually these things are drafted in advance by deputies, and indeed one had been prepared this time. “It was fine,” the senior Finance official recalls. “It was your nice, perfectly acceptable G7 communiqué.” It went on at much the usual length, in much the usual cautious diplomatic language. Aware of the urgency of the situation, the ministers decided to tear it up.

“I was an advocate for that,” Flaherty says. “I was really concerned that we had to get away from the traditional kind of communiqué . . . We had to do something we could put on one piece of paper, that was clear and decisive.” Anticipating such an eventuality, Bernanke had brought with him his own, nine-point plan. In the meeting, it was boiled down to just five points, with the ministers, governors and their deputies drafting and redrafting the document on the spot.

The “Plan of Action” they released later that day was just 262 words long, expressed in prose that, by diplomatic standards, was almost profanely blunt. “The G7 agrees today,” it began, “that the current situation calls for urgent and exceptional action.” After the briefest preamble, it committed the G7 to:

1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets.

It was all there: a comprehensive, coordinated international response to the crisis, at last. There was a further promise to “protect taxpayers” and “avoid potentially damaging effects on other countries.” There was mention of using “macroeconomic policy tools as necessary and appropriate,” and a pledge to address “the pressing need for reform of the financial system.” But the key to the whole thing was that first point. When it came to “systemically important financial institutions,” the G7 countries would “use all available tools” to “prevent their failure.” Not “work to reduce,” or “strive to ensure,” or the usual summitspeak. Prevent.

The second and third were almost as stunning. Central banks were pledging to provide unlimited amounts of liquidity (“take all necessary steps”), if necessary; banks would have access to capital from “public as well as private sources” if that’s what it took.

The governments of the seven richest nations had just gone all in. They were pledging every last dollar of their treasuries, if necessary, to defend their banking systems. There would be no more Lehmans.

Events moved very quickly after that. As it happened, there were a series of international meetings planned in Washington that same weekend: everybody who was anybody in the global policy community was there. The G7 representatives met with then-president George W. Bush the following morning, and won his public endorsement for the plan. Later that day the IMF agreed. There remained only to obtain the endorsement of the G20 that evening.

President Bush was a surprise attendee, giving a graceful speech accepting America’s share of responsibility for having created the crisis, and pledging his commitment to do whatever it took to set things right. It was by all accounts an effective intervention.

It was Saturday night. All of the major world economic organizations had now endorsed the five-point plan, which as Flaherty notes, “hadn’t existed 36 hours before.”

Within the next 24 hours, governments began putting the plan into action. For Canada, this presented some ticklish issues. There was the risk that, by signing on to a pledge to prevent any systemically important bank failures, the government might be seen to acknowledge there was some risk of that happening. On top of which, there was the British parliamentary tradition that governments do not take major decisions during an election campaign. Nevertheless, Finance put out a press release the following Monday that at least appeared to commit the government of Canada to the fight.

Carney was exultant. “The G7 had done what it said it was going to do by the time the markets opened. Which was imperative. And the markets did open. Which was a considerable achievement.”

Not only did they open, they positively roared their approval. On Monday, Oct. 13, the Dow Jones gained nearly 900 points, erasing half of its losses of the previous week. It didn’t last—the Dow dropped nearly 800 points that Wednesday, though it regained those losses over the next two weeks—and the market continued to drift downward for several months afterward, as the effects of the financial shock worked their way through the real economy. But the accelerating, cliff-like decline of September and early October had been halted. The panic had been broken.

The effect was even more dramatic on the credit markets. Again, the chart tells the story. It is surely no coincidence that the spiking TED spread hits its very peak, at 464 points, precisely on Oct. 10. From that day on it began to drop, precipitously. By January the TED spread was back to around 100 points, the level it first hit back in August of 2007. Today, it sits at less than 20 points.

Even so, the G7 had to work to establish the credibility of its plan. “I think some people believed us,” Carney says, “but I think a lot of people didn’t. And I think that this went on longer than it needed to because people didn’t fully believe it.” It was only in the first quarter of this year that “people started to say, okay, Bank X is really going to be around, because government Y says they’re not going to be allowed to fail.”

Talking to the Canadian participants a year later, it’s hard not to detect a certain weary pride at their part in the process, mixed with a sense of affection for the battle-scarred old G7, even as it is about to be supplanted by the G20. Perhaps Oct. 10 will prove to have been the G7’s last hurrah. Flaherty’s not so sure. The close personal relationships that develop among the G7 ministers, the common challenges they face as democratic politicians, the similarities in their economic systems—in the crunch, these had proved invaluable. “I mean, there are lots of debates about G7, G8, G20, and it shows to me that there is a place for smaller forums. At a time of crisis, I don’t know what we would do with 20, 25 people around the table.

“We’ll see what the next crisis brings.”