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Bankers from other institutions rushed to reassure shareholders that they did not need Bank of England funds. It emerged rapidly that Northern Rock could not survive without being acquired by a rival but none volunteered, put off by a £2.7 billion refinancing bill, its shonky mortgage book and limited branch network.

The infection spread to other parts of the financial markets, such as bond insurers. Citigroup, then the biggest bank in the world, started to dump losses. Merrill Lynch admitted at the end of October to $7.9 billion of bad debts. Between December and March, central banks across the world started slashing interest rates in the hope that cheap money would cushion the strain. Brussels set up a $500 billion facility just to tide banks over the Christmas period.

In January 2008 major stock markets, including London, suffered their worst one-day fall since 9/11, prompting the US Federal Reserve to reduce the cost of borrowing in the biggest cut for 25 years. Alistair Darling, the Chancellor, announced the following month that Northern Rock was to be nationalised.

It took one month for the next major bank to break. Bear Stearns, the weakest of the five Wall Street banks, was acquired by its bigger rival JP Morgan Chase in a deal worth $240 million, having been valued at $18 billion the year before. The manner in which the acquisition was handled dictated the rescue terms of every other terminally fractured US bank over the next 18 months. Four men masterminded every subsequent US bank rescue deal: Henry Paulson, the former US Treasury Secretary; Ben Bernanke, the chairman of the Federal Reserve Board; Christopher Cox, the former head of the Securities and Exchange Commission; and Tim Geithner, then president of the New York Federal Reserve Bank, latterly President Obama’s Treasury Secretary.

While hedge funds were allowed to snap like twigs under the financial strain, no US bank, large or small, was allowed to go bust on a weekday. The rescue talks often began in earnest on a Friday evening when world stock markets were shut. Mr Paulson was worried that if private rescue talks were leaked during the trading week, it could trigger wild swings in the stock market. The public statement declaring a troubled bank’s new buyer or winding down arrangement would typically be made by early evening on a Sunday in the US, just before Tokyo opened for Monday morning business and 13 hours before New York. On the other side of the Atlantic, RBS, UBS, the Swiss bank, and Barclays begged existing investors to pay £27.2 billion of new money between them to repair their damaged balance sheets. A number of banks also sold stakes in themselves on the cheap to cash-rich foreign states such as Qatar. But existing small UK shareholders were reluctant to increase their holdings at all as they watched the value of their own homes fall for the first time in 12 years.

Two months later, in July 2008, HBOS, then Britain’s biggest mortgage lender, tried to raise £4 billion from its own shareholders. It was a disaster. Only 8 per cent of investors agreed to buy more stock. Within days, the Chancellor warned Britain that it faced its worst economic crisis for 60 years and that the recession would last far longer than most had feared. Within a week, the world economy was plunged into the worst financial storm since the Wall Street crash of 1929.

The pace of the crisis accelerated to such an extent that almost each day delivered a new horror. On September 7, the mortgage lenders Fannie Mae and Freddie Mac, which accounted for almost half of all America’s home loans, were bailed out by Washington in one of the biggest financial rescues in history. The US taxpayer was faced with guaranteeing $5 trillion of outstanding loans. Three days later, Lehman Brothers admitted that it had lost $3.9 billion in 12 weeks. Rumours spread across Wall Street and the City that Dick Fuld, the head of Lehman, had not been able to find a rescue buyer.

On September 12, 2008, office workers descending into Wall Street’s subway on their way home may have noticed the stream of limousines pulling up around the corner. Like hearses, they delivered 30 of the world’s most powerful financiers to the office of the Federal Reserve. Between them, the men controlled the world’s banking system and they had been summoned by Mr Paulson to be told that Lehman was bust. He said that the US taxpayer was not going to bail it out and warned them that, if they failed to rescue Lehman or carve it up, they would all be caught up in the havoc. Those who attended included Lloyd Blankfein, chief executive of Goldman Sachs, and John Thain, his opposite number at Merrill Lynch. Mr Fuld was not invited.

By 3pm on Sunday, the rescue talks were off. Barclays had wanted to do a deal but was blocked by Britain, which demanded that the US Government should sweeten any deal with American money. With the collapse of Lehman now inevitable, employees of the bank in Canary Wharf and Manhattan were summoned back to their desks to calculate the bank’s colossal exposure and prepare for bankruptcy.

Mr Thain realised that his bank would be the next casualty. As Lehman employees packed up their belongings, Mr Thain was secretly signing a deal to sell Merrill to Bank of America for $44 billion. He even made sure that $4 billion of bonus payments for himself and Merrill staff were accelerated before the agreement was signed.

Six weeks before US presidential elections, Mr Paulson was adamant that the American taxpayer would not be called upon to bail out Lehman. Just before midnight, Mr Fuld announced that the bank was bust. During the course of one day, half of Wall Street had either been taken over or been declared bankrupt.

A far bigger, immediate financial crisis loomed. AIG, the world’s biggest insurer, was on the brink of collapse. Washington could not let AIG fail because it would have triggered a terrifying financial unravelling across the world. AIG, founded in Shanghai, owned substantial businesses. Most importantly, a huge financial markets business, with big operations selling products called credit default swaps, effectively writing insurance policies against other companies’ bankruptcies. In September 2008, it controlled assets worth $1 trillion. By the end of Monday, Washington had bailed AIG out with $85 billion and taken control of a 79.9 per cent stake.

In London, Sir Victor Blank, venerable chairman of Lloyds TSB, was signing a deal to bail out HBOS. After a run on HBOS shares, the British Government agreed to waive all competition rules and allow Lloyds to buy the bank, grabbing a third of the UK mortgage and savings market in one go. The deal went through but the strain of assuming HBOS’s bad debts on the healthier Lloyds became unsustainable. The transaction bought HBOS only a month before it needed to be bailed out.

The US Treasury Secretary became convinced that the whole banking system was vulnerable and came up with a plan three days later to rescue everybody. He proposed setting up a bailout fund into which $700 billion of taxpayer money would be pumped to buy lenders’ bad debts so the banks would start trusting each other again and start lending. Despite all-night talks during which politicians were ordered to leave their BlackBerries outside and Mr Paulson went down on one knee to beg Nancy Pelosi, the leader of the House of Representatives, to be sympathetic, it failed. On September 29, Congress blocked the creation of the fund and the markets slumped.

Mr Paulson’s counterparts on the other side of the Atlantic were also having a bad day. Having sought to secure HBOS days before, the Chancellor was forced to announce that Bradford & Bingley was to be nationalised and made the British taxpayer take control of £50 billion of its mortgages. To make matters worse, Iceland, whose own financial system was intertwined with the fate of British investors, started to collapse.

Desperate to create a fund that would help to restore some confidence in the US financial system, Mr Paulson endured new talks to persuade Washington to agree to the $700 billion rescue plan. On October 3 on the White House lawn, Mr Paulson announced his deal.

On the morning of October 7 in London a bloodbath broke out in the markets. A Treasury official phoned Mr Darling, who was in Europe at a meeting of finance ministers, to say that RBS stock was down 40 per cent, pulling the rest of the banking sector with it. A team led by the Prime Minister’s trusted aide Baroness Vadera rapidly drew up a three-point plan to provide liquidity, guaranteed funding and capital injections. They agreed a new £50,000 threshold to guarantee retail deposits. They pulled together a rescue package of £50 billion for the banking system, supplemented by another £200 billion of support. By the end of the day, five central banks including the Bank of England had cut interest rates by half a percentage point.

Had observers been in any doubt about the purpose of releasing a wall of money on the British banking system, it would have become clear to them on the morning of October 13. The Government announced that it had pumped £37 billion into RBS, Lloyds and its new business, HBOS, to prevent the three lenders collapsing and part-nationalised them.

In the months that followed Wall Street and the City proved that they had emerged from the storm. The credit crisis began to spread to other industries, such as the automotive sector. But Westminster and Washington began the process of devising long-term assistance schemes and drawing up new regulatory regimes.

Within 18 months of the height of the banking crisis, Mr Paulson and Mr Darling had both been voted out of office. In neither case because they were seen to have personally failed to deal with the worst financial crisis for almost a century, but because politically both countries had moved on. Mr Paulson’s battered mobile Motorola phone, which was used to negotiate every bail-out, is now an artefact in the Smithsonian Institute. Observers may hope that the banking crisis is contained, if not consigned, to history.

Suzy Jagger covered the American sub-prime crisis as US Business Correspondent until February 2009.

SNP pioneers of minority rule

Angus Macleod

Scottish Political Editor

Within the 2005 general election there lay a warning for Labour north of the Border that went largely unheeded. The party in Scotland, as everywhere else in Britain, had benefited for years from the Tony Blair “Big Tent” approach to building support across voter categories and divides. Yet, as opposition to the Iraq War lingered, that essential coalition of interests showed signs of breaking up in Scotland. Suddenly, middle-class Scottish voters who had supported the party since the mid-90s were increasingly exasperated and bitter. While its Scottish working-class heartlands stayed loyal, less committed Labour voters turned to the anti-war Liberal Democrats and SNP, to voice their dissent. Urban seats in Glasgow, Edinburgh, Aberdeen and throughout Scotland’s central belt, while still returning Labour MPs, had become highly marginal.

If there was disillusion with Labour at UK level, the same was true at the Scottish Parliament. Devolution had recovered from early traumas over MSPs’ expenses and controversy over the £400 million cost of the new Holyrood building, but it had not delivered the step change in public services that the Scots imagined it would. The Labour-led Scottish Executive had delivered groundbreaking policies, such as a ban on smoking in public places and free personal care for the elderly, but it was widely perceived to have governed looking over its shoulder for approval from London. For the Scots, devolution had not been Scottish enough.

The SNP, once more under the shrewd leadership of Alex Salmond, who returned to the post in 2004, was also recovering from a series of average election performances but Mr Salmond saw that the 2007 Scottish Parliament election would provide his party with its biggest chance yet to win power.

He saw that his party representing the Scottish interest and with no obligation to a wider party at UK level left him a golden opportunity. He set about professionalising the party machine, amassing an unprecedented £1 million election war chest from sympathetic business donors and presenting a set of policies that played into Scottish anxieties about escalating council tax bills, the NHS and education priorities.

Labour was flat-footed, perhaps believing that an SNP victory would never happen. In the months leading up to the 2007 election, it was obvious that only one party had momentum and it was not Labour. Anxieties about the SNP’s core aim of independence were put to one side because voters knew that the break-up of Britain could not happen without a referendum. Labour’s campaign was confused; the SNP’s, with promises to abolish the council tax, cut class sizes and restore hospital A&E units, was exciting for many of those “soft” Labour voters who had deserted Labour in 2005 and were ready to do so again. To Labour’s dismay and disbelief, the SNP emerged as the largest party. When their promise of an independence referendum proved an insuperable roadblock to forming a majority coalition with the Lib Dems, Mr Salmond opted for minority government, daring Labour and the other unionist parties to bring him down. His calculation proved prescient especially as his honeymoon in government turned out to be no nine-day wonder. He and his minority government set about delivering on manifesto promises that did not need legislation. Through delicate and skilful manoeuvring, he was able to attract enough support from at least one opposition party to get his annual budgets through Parliament.

Labour was dumbstruck. Unable to react, it became embroiled in an internal row over the leadership campaign expenses of Wendy Alexander, who succeeded Jack McConnell as Scottish leader. She resigned and was followed by Iain Gray, whose dogged but lifeless leadership meant that Mr Salmond, as First Minister, was able to retain his position as the major personality of devolved politics. As Labour’s problems grew at Westminster under Gordon Brown, poll after poll showed that the SNP was, if anything, consolidating its position in Scotland.

The gloss was bound to come off the nationalists at some point. From mid-2009 it did. Their very status as a minority administration meant that a whole series of probably over-the-top manifesto priorities, such as cutting class sizes and abolishing student debt, had to be ditched. The SNP had delivered a council tax freeze, but the next step of abolishing the tax altogether and replacing it with a local income tax was also put on hold, simply because the nationalists did not have the parliamentary votes.

Labour, in the meantime, entered into an opposition coalition with the Lib Dems and the Conservatives over constitutional powers looked at by the Calman Commission, which recommended a tranche of new tax-raising and other powers for Holyrood. Calman was a direct riposte by the unionist parties to the SNP’s independence agenda, although some unionists saw it as yet another concession to the nationalists. The SNP, for its part, was busy redefining what it meant by independence, talking loudly and often of a “social union” with the rest of the UK that would give Scotland full fiscal independence but with shared defence and diplomatic interests and retaining the Queen as head of state. It was dubbed independencelite. It was also a recognition by the SNP that Scotland, for all the SNP spin about the “London” parties, remained firmly unionist while wanting their devolved Parliament to acquire more profile through greater autonomy from Westminster.

The 2010 election allowed Labour to present itself as more in tune than the SNP with Scots’ wishes on the constitution while exploiting to the full Scots voters’ fears about a Conservative government returning to the worst days of Thatcherism. Many found the latter tactic somewhat childish and disreputable, but there is no doubt that it worked. The key trend in the general election results of 2010 was that voters throughout Scotland voted for the party in their constituency most likely to keep the Tories out. Labour was the main beneficiary, returning 41 MPs, while the Lib Dems retained 11, the SNP repeated their 2005 performance with 6 MPs and the Tories returned a paltry 1, showing that whatever else, David Cameron was still regarded with suspicion north of the Border. But Labour, for the first time since devolution, found itself in opposition on both sides of the Border.

Northern Ireland comes back from the brink

David Sharrock

Ireland Correspondent

It was the parliamentary term in which the Northern Ireland peace process was finally completed, a time of extraordinary events that few could have imagined even five years earlier. The defining image must be that of the Rev Ian Paisley, the old warhorse of No Surrender Unionism, and Martin McGuinness, the former “Public Enemy No 1” in his role as Provisional IRA commander, laughing uproariously together in the company of Tony Blair, the Prime Minister, and his Irish counterpart, Bertie Ahern. And yet there should be no surprise that, this being Northern Ireland, the conclusion of the peace process does not mean the end of the Troubles nor the threat from violent Irish republicanism to the security of the State. A page was turned in the history of Britain’s involvement with Ireland but the story was left far from over.

The backdrop was the usurpation of the Ulster Unionist Party, since the founding of the Northern Ireland state its “ruling party”, by its rivals the Democratic Unionists in the 2005 general election. As disaffection with the outworking of the 1998 Good Friday Agreement and the dysfunctional power-sharing Executive led by David Trimble, the First Minister, reached new heights among Unionists, a sea change in voting patterns swept away the ancien régime, rewarding the DUP with nine Westminster seats and reducing the UUP to just one, North Down, held by Sylvia Hermon.

Mr Paisley’s party promised an end to “pushover Unionism” and the experiment of sharing power with Sinn Féin, the political wing of the Provisional IRA. Yet even before the 2005 anointment of the DUP as the new voice of Northern Ireland’s majority community, there were sufficient straws in the wind for Mr Blair’s advisers to form the view that the real endgame in Ulster was to bring together the political extremes, abandoning the centre ground shared by the UUP and the SDLP, to create a new political status quo.

Indeed, Mr Blair’s delayed departure from No 10 had much to do with the Prime Minister’s determination to see his project reaching some definable goal, nearly a decade after the euphoria of the Good Friday Agreement. He courted Mr Paisley assiduously with a near-perfect reading of the psychology of Ulster’s “Dr No”. By now in his 80s and with a terrifying brush with mortality a recent memory, Mr Paisley was conscious that his political career was drawing to a close. He wanted, and was encouraged by Mr Blair in this with lengthy intimate chats about religion, to leave behind a legacy that subverted all the beliefs of his admirers and enemies.

At the same time Mr Blair’s wingman in Ulster, the Northern Ireland Secretary Peter Hain, was given the job of playing Bad Cop to the PM’s Good Cop. Mr Hain threatened the DUP with dire warnings that, if it failed to respond to the political progress that Sinn Féin was making, the British and Irish Governments would implement a Plan B – a far deeper green shade of Direct Rule for Northern Ireland bordering on joint sovereignty shared between London and Dublin.

Sinn Féin was suffering some game-changing setbacks. The manner in which Mr Blair had indulged Republican leaders for so long over the Provisional IRA’s failure to decommission its vast arsenal of weaponry no longer impressed Washington, which began to threaten Gerry Adams’s frequent trips to the United States with visa withdrawals. The Provisionals’ murder of Robert McCartney, a working-class Roman Catholic from a strongly Republican Belfast district, in addition to the £26.5 million cash raid from the Northern Bank – at the time the largest robbery in UK criminal history – set an ominous new tone. Sinn Féin was in a corner and only the winding up of its military wing would extricate the party.

With time running out for Mr Blair, the scene was set for a final attempt at resolution with one more round of negotiations at a venue away from the pressures and distractions of Belfast. In October 2006 the parties and British and Irish leaders convened at St Andrews. Even the choice of a Scottish location played to Mr Paisley’s Ulster-Scots roots. The DUP leader was said to be more enthusiastic than some of his party officers on signing a new international treaty between two sovereign governments that Mr Paisley would argue was an improvement on the 1998 Belfast Agreement.

The St Andrews Agreement contained more inducements for Mr Paisley than it did for Mr Adams and Sinn Féin, but the republicans also knew that they had fewer cards to play. Just as with Mr Blair, Sinn Féin’s investment in years of developing a political strategy to achieve Irish unity without resort to violence now depended on the man who had made a career out of wrecking every attempt to reach an accommodation with nationalism. Sinn Féin agreed not only to recognise but to support the forces of law and order in the guise of the Police Service of Northern Ireland, a reformed Royal Ulster Constabulary shorn of its name and emblems, in return for the DUP’s agreement to share power at Stormont. This was the moment when the sacred cow of the legitimacy of the Provisional IRA, a construct of the Irish liberation movement dating back to 1919, was finally dispatched. The following summer the Provos would quietly announce that they had formally ended their campaign to force Britain out of Ireland.

Symbolically this was a significant victory for Mr Paisley and the DUP, but it was still proving to be a hard sell to his grassroots, for so long weaned on the rhetoric of smashing Sinn Féin and republicanism. Mr Paisley demanded and got another Northern Ireland Assembly election, the tenth time that Northern Ireland had been called to the polls since 1998, to test his mandate for going into government with his former sworn enemies.

The March 2007 election rewarded the DUP with 36 seats in the 108-seat Assembly, reinforcing its primacy. The UUP managed only half that number and Sinn Féin also pulled away from the SDLP, taking 28 seats. On May 8, Mr Paisley was formally sworn in as First Minister. “If anyone had told me that I would be standing here today to take this office, I would have been totally unbelieving,” he said. Mr Blair and the Provisional IRA’s ruling Army Council, separated by just a few seats, watched from the Stormont gallery. Mr McGuinness took the oath as Deputy First Minister. Mr Blair left office with his peace project prize.

The “Chuckle Brothers” era was golden but brief, a honeymoon period in which the two former enemies laughed in public at one another’s jokes even though Mr Paisley still refused to shake Mr McGuinness’s hand. The former’s fortunes soon waned. Having been schmoozed by the Establishment he had for so long spurned, even his wife Eileen was now a member of the House of Lords, he was rejected by the very Church he founded. Free Presbyterian elders forced him to stand down as Moderator over his decision to share power with “unreformed terrorists”.

It was the tangled allegations of financial impropriety against his son Ian Jr that provided the excuse to get rid of him (the Stormont Ombudsman later cleared him). Mr Paisley tersely announced that he was retiring, to be replaced as DUP leader and First Minister by Peter Robinson. Mr McGuinness learnt of it from the radio news.

Mr Robinson promised a new era of “business-like” dealings with Sinn Féin: code for less grinning, which was going down badly with the grassroots. The DUP’s foot-dragging over the transfer of policing and justice powers from Westminster to Stormont began to unnerve Sinn Féin, which withdrew its cooperation, effectively rendering the power-sharing Executive mute for many months. In local parlance, the Chuckle Brothers had become the Brothers Grim.