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Banking Turmoil Posts
Lehman Brothers one year on. What if its collapse had never happened??
October 9th, 2009
As has been spread across all the papers over the past week, it’s the first anniversary of the collapse of Lehman Brothers, which marked the start of the global crash into recession.
I had never really understood until very recently the full reasons behind the collapse of the bank and how near they were to agreeing a deal that would have saved not only the bank but also the rest of the world collapsing into an abyss.
The London Evening Standard (http://www.thisislondon.co.uk/standard/), carried a thought-provoking article surrounding the anniversary. It claimed that had the bank been rescued, Barack Obama may not now be President. Had the bank been rescued, Michael Jackson may now still be alive.
The logic was that the public anger against the banking sector in general and ‘fat cat’ bankers specifically led to a surge in anti Republican feeling and the sense of a need for change, which Obama was offering. The public saw him as the guy who would come up with the solutions (even if he didn’t have any.).
Michael Jackson would still be among us, the article claimed, he would not have been forced to agree to a gruelling tour to re-coup some of his lost millions. Preparing for the tour pushed him to the extreme.
But how close did Lehman Brothers come to being saved? It seems much closer than many of us would expect. And it all came down to a game of poker-like nerves.
The bank filed for bankruptcy on Monday 15th September 2008. On the Friday before, Bank of America had been trying to put together a deal to save Lehman Brothers. This collapsed after Henry Paulson, the then US Treasury chief, refused to give BoA assurances that Lehman’s liabilities would be underwritten by the US government.
Barclays, the UK Bank, came onto the scene, with Bob Diamond flying from London to Washington to try to put together a deal to buy Lehman. Diamond asked Paulson for the same assurances and these were refused, saying that he must get an assurance from the UK government. Alastair Darling, UK Finance Minister, flatly refused to give assurances, saying that it would be inappropriate for the UK government to underwrite the debts of a foreign bank.
So the negotiations broke down and by Sunday, the clock was ticking and nothing was happening. If no deal could be brokered, Lehman Brothers would close its doors at midnight on the Sunday, New York time. Paulson would not budge and neither would Darling. As midnight approached there was a total silence from London and Washington, with Barclays firmly believing that at the last moment Paulson would agree to the assurances.
Midnight came and went, and with it so too did Lehman Brothers.
Most commentators now believe that this should never have happened, as the collapse of Lehman led to total fear in the markets globally. Besides, Paulson agreed to support AIG 2 days later. He could easily have done the same for Lehman.
So all of this could have been avoided, Michael Jackson would still be alive and Barack Obama still a Senator from Chicago.
Guess which country escaped the recession?
July 31st, 2009
I wrote about this a few months ago and it seems my hunch was right – our antipodean friends down under are winning through when the rest of the world is limping along.
According to the UK financial paper CITY AM, Australia has managed to avoid the recession.
There has been alot written about the recession being a global phenomenon, affecting every developed country. Yet Australia is a glaring exception; it has not only avoided the worst of the destruction, but has not even gone into recession, which is truly astonishing.
Although Australian GDP contracted by 0.6% in the 4th quarter of 2008, it expanded by 0.4% in the first quarter of 2009, which seems to have gone unnoticed in Britain and elsewhere. But why has this happened?
The Reserve Bank of America started to hike interest rates in 2002, many years before the rest of the world realised that an irrational exuberance had set it. The bank had taken early action to cool the property market which in 2002 in Australia was spiralling out of control and the impending bubble threatening the economy. Sounds familiar?
Plus the Australian banks steered clear of sub prime loans – accounting for just 1% of the total in 2007 versus 13% in the US, so their banking infrastructure remained intact – there have been no bail-outs of banks and state-financed recapitalisations.
Their action led to a slowdown in home loan lending – from a peak of 21.5% in 2002 to only 7% in May 2007. As a result the housing market cooled down and Australians started to save money.
Even today the base rate in Australia is at 3.5%, much higher than the rest of the world – but the economy is ticking along despite this and they still have plenty of ammunition to reduce rates further if needed.
This may well be case-study material for the post recession analysts, one thing’s for sure. I will be happier than ever to jump on plane to Oz to visit some of my customers.
How to make (and lose) a fortune
June 28th, 2009
Here, in a slightly different format, is how Nick Leeson, the rogue trader, managed to bring down Barings Bank in 1995.
It also shows how easy it is …
Bet someone a pound that a coin will come up heads.
If it does, you win a pound.
If you lose, propose doubling the stakes and playing again.
This time, if you win, you win two pounds, more than making up for the pound you lost last time.
And if you lose again, propose doubling the stakes again to four pounds.
This time, if you win, you win four pounds, more than compensating for the three pounds you lost last time.
If you lose, just propose doubling the stakes again to eight pounds.
As long as you keep playing until at last you get ahead, you never lose money.
It sounds like a great game.
The only problem is that there is a small finite chance that you’ll keep on getting tails.
Unless you have infinite money, you can’t keep doubling forever.
If you get twenty tails in a row, you will have lost over half a million pounds.
Perfect Storm brewing in Eurozone
May 23rd, 2009
Anatole Koletsky writes in Monday’s Times about a perfect economic storm brewing. As someone who is very much involved in international business growth, it’s vital to have an ear to the ground as to what is happening economically worldwide. It’s an uncertain time for all of us but those businesses looking to expand internationally need to be careful of one thing – that their ladder is leaning on the right wall before they climb it.
Here’s the basis of Koletsky’s ‘perfect storm’.
Firstly, he argues that Germany is facing an unprecedented economic decline. Last Friday the EU Commission issued data showing that Germany had suffered the worst economic collapse of any industrialised nation since 1945. The German economy has seen a fall over the past 4 quarters which has been acellerating, now showing an annual drop of 6.9% (US is 2.6%, UK, 4.2%). What it shows is that the credit crunch has been far more damaging to Germany and many of its continental partners than in the US and UK. Germany’s export-led economy is struggling to find a market in the current climate.
The second aspect of the ‘perfect storm’ is that certain Eastern European countries have borrowed far too much – up to 20% of their national incomes each year. These have been fuelled by bank loans taken out by consumers, businesses and governments in Euros or Swiss Francs in Austria, Sweden, Italy and Greece. Eastern European countries such as Latvia, Estonia, Hungary and Estonia are already teetering on the brink so if their currencies collapse there will be a tsunami of bankrupties from homeowners and businesses.
The third component of the economic hurricane is the Euro itself. In the first 10 years of the Euro’s existence it provided the stimulus for economic growth in countries such as Denmark, Ireland, Spain, Portugal and Greece. But these countries also ran up massive budget deficits and housing / mortgage booms far in excess of those seen in the US or UK. This growth fuelled exports of luxury cars and consumer goods from Germany and so the wheel turned.
What has happened in the past few months is that the Euro has turned from being a saviour to a threat to these economies. The US and UK have ’sovereign currencies’ (as do many others such as Switzerland, Australia and New Zealand), where we can effectivey ‘print money’ to get out of debt – in extreme cases. Countries in the Eurozone cannot do this.
The risk now is that each of these 3 aspects converge and create a sequence of events could lead to the collapse of much of the Eastern European economy, effective bankruptcy of countries such as Ireland, Greece and Spain, and a plunging economic output across the Eurozone.
Of course this may not happen, but one thing is for sure – where there are signs of economic recovery in the UK, US and other parts of the world, Europe may have a long way to go before coming out of this mess.
Quantitative Easing – do I get that from Boots?…
March 10th, 2009
Quantitative Easing – sounds like some deadly remedy from childhood days. A lethal cough linctus or on similar lines to ‘milk of magnesia’… It congures up images of Victorian institutions …
But in fact, as we all now know, it’s a fancy way of saying Gordy is printing money. It feels a bit like joining the ranks of Zimbabwe or being in the Weimar Republic in the 1930’s – but what are the implications for us all and what is likely to happen? It didn’t work for Japan in the late 90’s so why take this big last gamble?
Reading the press on this, my conclusion is that we don’t have much choice. We’re damned if we do nothing and seem to be critisicised if we don’t do anything. But 75 billion pounds of new money – it’s mind boggling.
A month ago I wrote about business needing a kick start instead of another rate drop. Yesterday the Bank of England dropped the rate to 0.5% – a new unknown territory. Now ‘quantative easing’ can begin apparently, as all the other firepower has been used.
What will happen is that the BOE will create ‘virtual money’ (not actually print cash) and use this to buy bonds and other securities from banks in the hope that they will use the money to lend to business and consumers.
The big risk is that the banks will hoard the money and sit on their hands, and nothing will happen.
Let’s hope not, as there’s a lot staked on this, and not many options left.