The financial services industry (banking, lending, credit cards, investments and insurance) was suffering miserably on a global basis as 2008 wound to a close, in the midst of what will be remembered in business history books as the "Great Financial Crisis of 2008." Hopefully, central banks of governments worldwide have acted aggressively enough and powerfully enough to keep the financial crisis of 2008 from evolving into a "great depression of 2009." However, the turnaround of the world's economy and a rebound of the banking and investment system will take a long and trying time.

How did this disaster occur? Multiple factors were involved, many of which began as long ago as 2001, including:

• An era of loose lending rules for business loans.
• Incredibly easy credit for consumer loans, including mortgages, automobile loans and credit cards.
• Exceptionally low interest rates.
• A multi-year, worldwide economic boom that encouraged risk-taking by borrowers and lenders alike.
• A multi-year, worldwide jump in market prices for stocks, houses and commodities that further encouraged risk-taking and easy lending.
• Booming global markets for manufactured goods and for commodities such as oil created immense cash reserves in emerging nations, and much of those reserves were eagerly invested in debt instruments of all types, further fueling lending.
• Investors in debt-backed securities were lured into a false sense of security by overly optimistic ratings placed on those securities. Many of very highly rated mortgage packages turned out to be of little value. Meanwhile investors often thought their risks were well-covered by "credit default swaps (CDS)," a type of insurance that will pay off if a debtor defaults. However, the CDS are only as good as the finances of the company backing them.
• Investment banks, such as Lehman Brothers, were overextended, operating with very high leverage. Typically, they were holding assets of about 30 times their total level of capital. That means that they were borrowing heavily, at a rate of about $97 for every $3 of capital, and that a downward turn in asset values could quickly have devastating effects on their balance sheets.

Finally, in mid-2007, the bubble began to pop when a financial firm in Europe awoke to find that there was no longer an eager market for the mortgage-backed securities that it wanted to unload. The world of finance entered a downward spiral.

It would be easy, but incomplete, to point the blame at the United States. America is an easy target for blame-as the world's largest economy by far, America's economic bust has affected lenders, businesses and investors on a worldwide basis. Of course, those lenders, businesses and investors also benefited broadly, and gleefully, from America's tremendous boom from 2003 through most of 2007.

America's soaring housing market and easy credit led to the creation of poorly-conceived mortgages and mortgage securities. Investors who bought them have suffered. However, eager lenders, rocketing house prices, easy mortgages, aggressive construction of houses and high consumer debt were found not only in America, but were also matched or even exceeded in nations like the U.K. and Spain, and in major cities in nations such as Australia and Canada. Housing markets, stock markets and risk-taking rose to absurd levels in cities in Russia, China and India as well. The U.S. did have a unique impetus to its mortgage market: In recent years, Congress had unwisely pushed the mortgage industry, including government-sponsored mortgage banks Fannie Mae and Freddie Mac, to make home ownership easier to attain for people of modest income.

Banking has become a globalized industry in recent decades, in the same way that the automobile, pharmaceutical, technology, energy and consumer goods industries have globalized. The globalization of the banking industry was fueled by four factors: 1) the availability of global electronic networks for distribution of funds and real-time management information; 2) the easing of local regulations on ownership by foreign entities; 3) the opportunity to serve the needs of multinational corporations; and 4) the increasing attractiveness, from a banker's point of view, of business assets and rising household wealth in emerging economies. New business opportunities were sought out globally by major banks, especially in such booming markets as China and India. U.S. and European banks particularly took ownership in Chinese banks. Elsewhere, Spanish banks acquired banking firms in South America, Mexico, Puerto Rico and the United States (particularly in Hispanic markets within the U.S.). German and Italian banks merged to form European banking giants.

In Europe, major bank holding companies made significant acquisitions and cross-border investments while relying more and more on technology to make operations efficient. European Union regulations led to the cleaning up of balance sheets at Europe's banks and the implementation of better accounting practices. At the same time, the EU is attempting to change regulations to make banking across the region as seamless and consistent as possible.

As of mid 2008, the American banking system consisted of 8,451 FDIC-insured commercial banks and savings associations owning about 83,360 offices (down from about 86,000 one year earlier). Deposits in FDIC-insured organizations totaled $7.42 trillion in June 2008 (down from $8.04 trillion in June 2007), while assets totaled $11.43 trillion (down from $12.26 trillion one year earlier). In addition, as 2008 began, there were 8,101 credit unions with assets totaling $758 billion.

U.S. employment at banks, savings associations and credit unions totaled about 1.831 million in September 2008, down from 1.838 million one year earlier. Another 648,600 worked in other credit-related activities, such as mortgages and credit card operations. Significant reductions in employment in these offices will occur in late 2008 and 2009.

Meanwhile, as of 2007, U.S. consumers enjoyed the use of 415,321 ATMs around the nation, including 236,732 at non-bank locations.

American banking, until recently, enjoyed a state of deregulation not seen in decades. As a result, vast, national banking institutions grew rapidly by acquiring regional banking firms, entering new fields, increasing assets and expanding globally. The number of branch banks expanded as firms opened not only traditional branches but also branches in alternative locations such as supermarkets and Wal-Mart stores. Hundreds of thousands of ATMs across America became more sophisticated and multi-task capable, making them virtual branches.

Meanwhile, consumers and businesses are becoming much more reliant on online management of their bank accounts as the number of homes and businesses enjoying broadband access to the Internet has reached true mass-market scope. Over 100 million U.S. homes and businesses now have broadband, and banks are evolving their online services to take advantage of this infrastructure.

Non-bank companies remain a competitive threat to traditional banks. Retailers, automobile manufacturers, stock brokers, insurance companies and other business sectors are offering a growing array of bank-like services, from loans and mortgages, to credit cards, to money market accounts with checking account-like features.

The credit card industry is evolving as well. A truly revolutionary wave of "smart" cellular phones that act like debit cards and manage financial accounts is sweeping Asia and slowly taking root in Europe and the U.S.

Around the world, some major bank companies are using special units to provide services that conform to the tenets of Islam in order to take advantage of the rapidly growing Muslim population and the growing income of oil-producing Muslim nations and Muslim-owned businesses. (The Islamic concept of "Sharia" strictly limits the use of interest charges. Instead, many business deals must be structured on lease, rent or other alternative contracts in order to be acceptable.) Many Muslim-owned banks are competing fiercely while enjoying soaring growth.

In our research published during 2005, 2006 and 2007, Plunkett Research consistently warned of the high debt levels carried by American consumers and of the pending difficulties in the mortgage market due to lax lending practices and adjustable interest rate loans. By late 2007 a high level of defaults and foreclosures had clearly come home to roost, creating significant turmoil in banking and credit markets both in the U.S. and abroad.

As of August 2008, American households owed more than $2.57 trillion in consumer debt, such as auto loans and credit card debt, up from $1.99 trillion at the end of 2002. The 2008 total is more than triple the amount owed in 1990: $808 billion.

Growth in residential mortgages has been even faster. At the end of 2002, total mortgages outstanding in the U.S. for single-family homes and properties of up to four residential units totaled $6.4 trillion. By mid 2007, that amount had ballooned to $10.7 trillion, according to the Federal Reserve. This was an unprecedented growth rate totaling 67.1% over five years. By June 2008, the amount had grown to $11.25 trillion. This is more than four times the amount owed in 1990: $2.61 trillion.

Up until early 2007, mortgage lenders had been pushing a long list of innovative products designed to make it easier to borrow while lowering monthly payment and credit rating requirements. Some of these mortgage variations were bound to lure consumers into self-destructive borrowing and buying as they paid too much for properties while diving deeply into debt. These products ranged from zero-down mortgages to 40-year, fixed-rate loans to "option" loans that allow the borrower to defer a large part of each month's payment. Many home owners now find themselves vastly overleveraged as a result of such mortgages. Banks, investment houses and investors of all types have written off hundreds of billions of dollars in mortgages during 2007 and 2008 as a result. The residential mortgage and construction markets are in a deep slump and will remain so for some time to come.

What's next in the world of banking and lending? Here are a few emerging trends to watch for: 1) Greatly increased regulatory oversight will restrict lenders of all types. 2) An era of much lower risk-taking by traditional lenders has begun that will last for years. 3) The creation of higher-risk loans and investments will taken over to a major extent by hedge funds and private equity funds, accelerating a trend that has already been in place for some time, and replacing some of the former roles of commercial banks and investment banks. 4) Intense debate will ensue about the possible creation of a global authority that could oversee banking, lending and investment sectors from a high level and perhaps act quickly to commit the central banks of the richest nations as a cohesive force in the event of emergencies. 5) Alternative lending sources will be used to a growing degree by small businesses and some consumers unable to get loans elsewhere. For example, peer-to-peer lending companies are growing through enabling lending by and between members of lending clubs, or between friends and family. Virgin Money USA makes it easy for reliable small business owners to set up loans from friends. Prosper.com enables borrowers to apply for three-year, fixed-rate personal loans online by connecting borrowers with individual lenders. On the other end of the spectrum, small businesses that are unable to obtain or renew bank loans will turn to high-cost "factoring," a method of borrowing against their receivables. 6) A lengthy and expensive process of write-downs by lenders will continue. Chris Flanagan, an analyst at JP Morgan Securities, estimated in late 2008 that the potential total of bad debts that need to be written off by lenders worldwide stood at $1.7 trillion. The International Monetary Fund (IMF) estimated the potential loss at $1.4 trillion in October 2008. The final toll could be even worse than these numbers, given the fact that significant losses from credit card debts, automobile loans, junk-rated corporate bonds and shaky municipal bonds will occur in 2009 and 2010. Source: Plunkett Research, Ltd.