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Fed red alert

Robert Peston | 07:47 UK time, Monday, 17 March 2008

The US central bank’s latest attempt to inject money and confidence into the financial system is its third in ten days – and arguably its most ambitious since the 1930s.

New York Stock ExchangeThe Federal Reserve has reduced the rate at which banks can borrow directly from it, trebled the length of time they can borrow and allowed 20 securities firms direct access to the same facilities.

It is also putting $30bn of US taxpayers’ money at risk by providing a lending facility to help JP Morgan acquire Bear Stearns at a knockdown price.

That $30bn is secured against assets of questionable value. And if they turn out to be worth less than $30bn, well the loss will be taken by taxpayers, not by JP Morgan.

To digress for a second, the state-subsidised rescue of Bear Stearns is remarkably similar to the plan for Northern Rock to be acquired by Lloyds TSB last September, which was backed by the Financial Services Authority but rejected by the Bank of England and the Treasury.

The reason for the Fed’s emergency evasive action is that it has become very concerned about what bankers’ call deleveraging, or the process of lenders wanting their money back from any creditor perceived as risky.

That puts strains on important financial institutions, such as Bear Stearns, and on the health of the financial system – which underpins the global economy.

Will the Fed's latest initiatives - including an anticipated half-percentage-point cut in its main lending rate tomorrow - do the trick?

That's very unclear.

The continued fall in the dollar weakens the confidence of global investors in the US.

The Catch-22 for the Fed is that providers of capital may become even more risk-averse having seen quite how worried the authorities have become.

UPDATE 11.35: Finance is global, so the shortage of liquid funds in New York has led to a shortage in the London money markets too.

That's why the Bank of England this morning offered £5bn of emergency, short-term loans to British banks.

But here's the scary statistic. Our banks put in bids for £23.6bn of these three-day loans.

Banks wanted more than four times what the Bank of England made available - which indicates they are not exactly flush with cash right now.

Little wonder the share prices of our leading banks are plummeting, with those of HBOS and Alliance & Leicester off more than 10%.

Wall Street's problem is our problem.

UPDATE 12.25:
Here is another scary trend. The dollar has been sinking like a stone against the yen, the euro and the swiss franc. Which tells you how nervous international investors are about the US economy.

But what should alarm us over here is that the one currency that hasn't strengthened against the dollar is our own, sterling.

That tells you that those who control the world's cash reserves fear that the UK economy is like the US economy in all the wrong ways, notably that our housing market is over-valued and we're too dependent on a financial sector under considerable strain.

Comments   Post your comment

  • 1.
  • At 08:35 AM on 17 Mar 2008,
  • john white wrote:

For many years the global economy has been held up the willingness of the American consumer to increase levels of personal indebtetness. It was quite a party but now the bill has arrived and it is time for a cleaning of the global stables. One of the major problems which must be corrected is the value of the Chinese Renimbi against the US dollar. China is a major beneficiary from open markets but it gains an artificial comparative advantage by managing its currency. The G7 should not hesitate to slap import tariffs of 20% plus on all Chinese goods unless Beijing stops acting like an unreformed planned economy. Russia should be engaged in a more constructive fashion with a view to developing a mutually beneficial future for the global economy. The Americans are paying the price for keeping all of our economies ticking over so there must no Schadenfreude as they go through a process of economic pain. Freeloading off the global economy must be stopped and one sided relaionships must be corrected.

  • 2.
  • At 08:44 AM on 17 Mar 2008,
  • SussexDon1 wrote:

Who decided $2 a share? The shares were trading at $30 a share last Friday. Do the existing shareholders have to accept the $2 offer? Have they accepted?
Were their other offers apart from JP Morgan? Why JP Morgan?

  • 3.
  • At 08:45 AM on 17 Mar 2008,
  • Kenn wrote:

America is not our biggest trading partner, if the dollar drops in value, so what,But the pound against the Euro, so weak.

fed is not doing enough for the poor house owners. Instead they are bailing out rich investment bankers.

cant they bail out the poor house owners who are defaulting ???

  • 5.
  • At 08:53 AM on 17 Mar 2008,
  • Mike Magoo wrote:

Fantastic analysis as ever Robert.

How successful do you think the US government bailouts, to the hugely levered funds can be, when the rest of the US industrial complex is paying for it through the nose with an inflationary slump.

And seeing the large drops in the UK banks, and the collapse in a hedge funds like peloton which are a symptom of the amount of leverage out there - how long before the UK crisis expands into another bank failure?

Brown may have bailed out the NR highly levered lending of 125% to bad credit worthy indivuduals, and the taxpayer now makes up the difference, but there has been a long period of bad lending out there.

  • 6.
  • At 09:19 AM on 17 Mar 2008,
  • FR wrote:

Bear Stearns had a large derivative exposure. This is the real cause of the freezing of the finacial system - not sub-prime, that's just a convenient label to feed the confused and disinterested masses.

Check out the figures in this latest table -

http://www.bis.org/publ/qtrpdf/r_qa0712.pdf

$618 TRILLION of derivatives outstanding as of Q3 2007 (add the 'all markets' futures and options totals), created by the worldwide banking system to finance ever-growing bonuses for the banking elite... and now the same banks that created them don't want to touch them. These derivatives have been sold into our houses, pensions and stock market.

Our financial system is in a mess so profoundly deep and complicated that no one can get a good handle on what needs to be done.

In fact, there is very little that can be done. Our fractional reserve system does not allow for a contraction of money in the economy. New debt has to be created to continue the cycle, but it appears we have reached the pinnacle, and now we must face the consequences of the greed that has ruled our lives for the last few decades.

I have my tin hat on. I have had it on since Aug 07.

  • 7.
  • At 09:20 AM on 17 Mar 2008,
  • Nick wrote:

Bear Stearns were trading at $35 on Friday and by Sunday they were taken out for $2 per share. It shows how the mighty can fall.
The US authorities have acted promptly to bail out BS unlike the Northern Rock debacle where Lloyds TSB offer to buy NR was turned down by the UK authorities.
The markets will now be looking around for the next weak player and we can expect more casualties in the months to come.

  • 8.
  • At 09:20 AM on 17 Mar 2008,
  • Ian Ryder wrote:

The US is painted into a corner and they've done it all themselves. It's my view that we're on the verge of the US doing a Soviet Union - how long will foreign governments keep lending them money? The deleveraging process can happen for countries too. I've been following these for two years now and it's all going roughly how the so-called bears have predicted...the end game is a collapse in the $ and a (probably) permanent shift in power to the East. Sadly the UK is in nearly as bad a spot as the US so as sterling falls while oil etc rise and the money making city declines, the next 10 or 20 years will be very different from the previous 10 or 20.

  • 9.
  • At 09:22 AM on 17 Mar 2008,
  • Cecil Stroker wrote:

The whole Bear Stearns debacle has been in the making since they failed to support their hedge funds and left their clients with nothing for their investment in a (as described by Bear Stearns) low risk investment. What Bear Stearns did was erode any confidence that their Risk Management and Traders could identify low risk investments and to compound this thir reputation in investing high networth clients money was gone when they let them fail. What the fed should have done is make an announcement that Bear was filing Ch11 but stressing that due to serious failures in management that investors were leaving Bear for more reliable competitors. this although would have caused a significant sell off on the market would have reassured the investment community that Bear Stearns problems were of their own making. Now the situation is this, If I was holding shares in Competitor firms of similar size (merrills, lehmans etc.) do I sell now and take 30 or 40 usd dependent on the price or risk getting 2 usd a share, also from an international point of view why should I invest in America the USd is plumeting so every USD assett I hold it has to outperform the offsetting loss in the USD and more importantly in real terms the US interest rate are set to drop another 75 bps may be more that would be 2.25% as the fed target rate, even the feds own inflation indicator suggest inflation of 2.7% this means in real terms you lose 50bps before performance.

  • 10.
  • At 09:27 AM on 17 Mar 2008,
  • John-Paul Coetzee wrote:

john white writes:
"China is a major beneficiary from open markets but it gains an artificial comparative advantage by managing its currency. The G7 should not hesitate to slap import tariffs of 20% plus on all Chinese goods unless Beijing stops acting like an unreformed planned economy"

and what on earth do you call a bail-out of a major bank by the taxpayer, if it is not the government "managing its currency"? Or planning its economy?

  • 11.
  • At 09:37 AM on 17 Mar 2008,
  • Kenn wrote:

John at #1.
Sorry John but I couldn’t disagree more. For many years the western economy has been held up by American willingness to spend more than they earn. They are no longer resource rich and have no more to offer than the UK, another service based country. As for singling out China as the problem, how about all the other countries that peg their currency to the dollar? The problem is the dollar is hugely over valued and this is just the start of the long over due correction. The same applies to most of the self important G7, ever tried adding up their combined debt? So much for the world’s richest countries. The problem for the west as far as China is concerned is that that they still have a work force larger than the entire US population that earn less than $2 per day. No amount of western ‘increased productivity’ is going to match that sort of cost base. China on the other hand will do little about changing the situation, they have their own internal issues to keep on top of and a very price competitive neighbour in India. On balance it is the western currencies and the dollar/pound in particular that are out of balance and require the adjusting they are beginning to receive.

  • 12.
  • At 09:41 AM on 17 Mar 2008,
  • anthony Samuelson wrote:

What seems to escape notice is that the Bear Stearns of this world, and the hedge funds, don't just do sub-prime and AAA mortgages. They also engage in the derivatives and futures markets where there is always a counterparty.

Supposing you get it right and are making a pile of money but the counterparty goes broke. What happens then?

  • 13.
  • At 09:41 AM on 17 Mar 2008,
  • Alan Watts wrote:

A few years ago Mr Brown and the Opposition were against going into the Euro. The Markets in Europe should be our trading partners for many reasons. One of them is that although we are a diverse group of cultures we do have a more understanding and attitude to our Needs and Financial Policies. The American Markets continually operate on an emotional reaction and not a logical and rational one. Recent years we have followed their path which is regretable. Whilst there are many U.S. Companies within Europe and Financial Operations are more reasoned and less reactive. It may be too late to reverse our trend and go into the Euro but we would be better advised to detach ourslves from Mother America if possible.

What seems to escape notice is that the Bear Stearns of this world, and the hedge funds, don't just do sub-prime and AAA mortgages. They also engage in the derivatives and futures markets where there is always a counterparty.

Supposing you get it right and are making a pile of money but the counterparty goes broke. What happens then?

  • 15.
  • At 09:42 AM on 17 Mar 2008,
  • phil bishop wrote:

Please will someone please advise what this will mean to the average UK a) business; b) consumer and c) homeowner?

Thanks

  • 16.
  • At 09:43 AM on 17 Mar 2008,
  • robert marshall wrote:

It sounds like JP morgan has stolen the good bots for nothing and lumbered the American tax payer with a fair proportion of dubious assets.
The problem is not so much what the Fed had taken on but what price the deemed assets.
Clearly marking to market has become irrelevant so there has to be a format prescribed by the Regulators to establish a new basis.
A prerequisite of that formula needs to be maximum leverage multiplier allowed against realisable assets.
If we don't have a formula in place soon a short sharp implosion will be the only result.
Sorry to sound so gloomy on a monday morning but we have been saying leveraging has been our of control and by definition what price assets and for regulatory purposes what value solvency?
These are not unanswerable questions if level headed folk address them.

  • 17.
  • At 09:47 AM on 17 Mar 2008,
  • robbyb wrote:

$2 a share....oy-yoy-yoy

  • 18.
  • At 09:47 AM on 17 Mar 2008,
  • mike wrote:

Sorry to sound gloomy, but we are in for a couple of dark years. The US banking system is fundamntally flawed. Balance sheets are stuffed full of intangible assets of questionable value. Losses are enedmic. Those banks who practice old fashioned practices of liquidity, solvency and modest lending based on real assets will weather the storm.

The Western banking system is over-inflated. Simple as that. We will all pay a heavy price. Credit will become more expensive and harder to get for businesses and individuals in the short term. This will naturally dampen demand, and in turn create recessionary tendencies. Who knows the outcome in the next few years.

What is interesting however, is the paradigm shift of the world's economy eastwards. The BRIC and related economies are all growing from a low base, and they possess most of the raw materials, and the consumer and business demand they need to self sustain their own growth. The east will not suffer recession as badly as the west.

The parallels are UK/US transfer of world economic dominance a century ago, and now US/Asean (China) transfer of world economic dominance now.

Who knows where this will lead for the longer term?

  • 19.
  • At 09:53 AM on 17 Mar 2008,
  • Lorna Bourke wrote:

The real worry now as the Fed slashes interest rates is the unwinding of the Yen carry trade as investors who have borrowed Yen to invest in dollar denominated stocks rush for the exit. The real bloodbath - which the Fed cannot control - is yet to come.

  • 20.
  • At 09:56 AM on 17 Mar 2008,
  • Bryan wrote:

Watch out for the 'deleveraging' process accelerating over the next weeks and months. The loudest screams will be from politicians in power, banks, bulders and buy-to-letters, as the asset inflation on which they rely for their sanity, dissappears.

  • 21.
  • At 10:08 AM on 17 Mar 2008,
  • Mark Ger wrote:

As of this morning 56% probability in market prices that the Fed will cut the full 1% at their meeting tomorrow...with events happening at such a pace that the effects of rate cuts are not able to filter through and positively impact on the individual, will the Fed look at any alternative measures or give up on slashing rates?

Why does Robert Peston always go about believing the tax payer should only look at risk free situations - it wasts billions on useless computers with tens of billions more to come - in the blink of an eye.

As I understand it much of the rest of the assets os Bear Stears are not sub-prime and are most unlikely to be worthless. In any case, if the tax payer did not support that deal what is the alteriative? My guess is a lot of dole payments made by the tax payer - so can we please have some little less hysteria in what is a very difficult situation - I am betting the best course of action was taken.

No: 2 above - Good and interesting questions I was wondering that also.

No3: The USA is probably our biggest trading partner - your seem to suggest it is the 'euro area' which as we all know (no matter how many would like it to be) is not a single country, but a currenty unit.

I am sure if you calculate all of the UK's dollar imports and exports they would far outweigh the 'euro' by a very large margin.

  • 23.
  • At 10:12 AM on 17 Mar 2008,
  • andrew wrote:

Robert, It would be useful if you wrote an article on just how dependent we are on the US economy. Not just how much we export to them, but how much we depend on them for dividends (many US big name trading companies are owned by UK companies, or have UK shareholders), and how much the City depends on the health of the US financial system. (And any other factors i may have missed)

  • 24.
  • At 10:13 AM on 17 Mar 2008,
  • Meltonmark wrote:

Don't you just love it! The banks and giant corps pay little if any tax. They rip us off with all manner of interest rate extras, added charges, late payment fines, you name it. Yet, when they go belly-up, it is the little people have to foot the bill. And we wonder why people no longer have an interest in democracy.

  • 25.
  • At 10:17 AM on 17 Mar 2008,
  • Geoff Woodgate wrote:

I agree with Ken, the value of the pound against the Euro lumps the UK with the US in terms of banking and mortgage problems, the UK has a more severe problem coming. Look at the relative USD/GPB/EUR interest rates. The pound is still overvalued.
Why is this played down by the BBC ?

  • 26.
  • At 10:19 AM on 17 Mar 2008,
  • Cantabrigiensis wrote:

I sold all my equity investments this morning and bought gold. In essence, what the central banks are doing is printing money in an attempt to convince us that the dollar and house prices are justifiable. Quite simply, it will not work.

  • 27.
  • At 10:24 AM on 17 Mar 2008,
  • Martin wrote:

There is one thing i do not understand: where do all the foreclosed people go? They can't be sleeping under bridges, can they? They may be in financial trouble, but most of them still hold jobs and could _rent_ the houses they just had to leave (maybe two families in one house or so). It would be stupid for the banks to just have all that real estate standing around unused, being subject to devaluation and vandalism. So, why can't the banks recoup some of their losses by renting out the houses they can't sell anyway (at least not now)?

  • 28.
  • At 10:24 AM on 17 Mar 2008,
  • Pete wrote:

to SussexDon post 2, the alternative was zero when Bear filed for Chapter 11 this morning. Once the liquidity goes, you've had it. Ask Northern Rock. This does of course make the job of valuing NR shares a whole lot easier, as they're worth nothing as well.

  • 29.
  • At 10:27 AM on 17 Mar 2008,
  • Seamus in Warsaw wrote:

Re: Comment 3. Kenn wrote:
America is not our biggest trading partner, if the dollar drops in value, so what,But the pound against the Euro, so weak.
#######################

Ken, I think this is the business equivalent of the UK/US special political relationship.

In the good times the GBP/FTSE followed, and were pulled along by the Dollar/DOW.

Occasional divergence, such as the rise of the Pound against the Dollar in the middle of last year, is the exception that proves the rule.

In bad times they both seem to be considered as even more over-valued than their US masters.

  • 30.
  • At 10:29 AM on 17 Mar 2008,
  • Tony wrote:

Ouch!
Or are we into 'Yikes' territory now?

  • 31.
  • At 10:30 AM on 17 Mar 2008,
  • chris wrote:

#17 phil bishop
a) nothing
b) nothing
c) nothing

  • 32.
  • At 10:59 AM on 17 Mar 2008,
  • Andrew wrote:

Capitalism on the way and socialism on the way down. How come these firms have to be bailed out? Why can the effects of capitalism not be allowed to bamkrupt J P Morgan? The reason is that then J P Morgan et al would have to admit that they do not know what they are doing. Instead we get a clear indication that the givernments in the UK and the US are in the back-pockets of these investment banks.

Capitalism works by enuring the strongest/wisest survive, the Treeasury in the UK and Fed in the US don't believe in it.

  • 33.
  • At 11:18 AM on 17 Mar 2008,
  • Jim wrote:

Since Northern Rock went to the wall , people should realise the economies ( world ) are up the river without a paddle ( being polite )

  • 34.
  • At 11:21 AM on 17 Mar 2008,
  • John from Hendon wrote:

Catch-22 = the bankers were allowed and encouraged for twenty years by the regulators to operate the levers of lending to move manufacturing business from the West to China, but when it all goes pear-shaped as was inevitable then we who lost our manufacturing businesses now have to support the bankers in the way they have been accustomed - this cannot be right either in market terms or morally!

Pumping money (liquidity) into banks that caused the problem will only maintain their profitability and do nothing about their very poor management and dubious judgment.

I have no answers - for if we regulate now we will deepen the crisis but the banks MUST be either forced or persuaded to show restraint in their profligate ways - there should be be no more bonuses and no more payoffs and (some?) of the previous payments should be recovered if necessary by legislative action e.g. a 100% income tax on all bonus payments paid to individual bankers for the past ten years. Banking is a service to industry and individuals - they should serve us not the other way round!


Robert you have summarised it excellently.

My comments - Worth or value boils down to knowing what you have bought, and how to dispose of it if needed - one word for this process is transparency.

The investment banking world has been caught out by an overall lack of transparency - investors did not know what they were buying and they had no idea of what value their investments would have if there was a perfect storm, and then when the storm came they could not get rid of them.

There has been a perfect storm and 80% of the world's debt securities are OTC - i.e they cannot effectively be marked to market - they are opaque and not transparent, so no-one really knows their true value. That breeds suspicion and confidence evaporates - everyone tries to bail out at the same time but because their investments are OTC they can only sell them back to the people they bought them from and it is these people who don't want to buy them or cannot afford to buy them. And because there are multiple cross holdings A wont lend to B because A knows B is holding a lot of instruments that he can't sell and which were sold to him by A.

Slam dunk - it hurts.


  • 36.
  • At 11:26 AM on 17 Mar 2008,
  • john thomas wrote:

The perfection of this storm is on it's way.

So far we have seen people struggle to make their credit and morgage payments because on intrest rates. It is generally accepted that we are now at the beginig of a slow down/ recession. How are people going to make those payments without a job?

And too here many are trumpeting China's and India's ability to come through this relatively unscathed... who's gonna buy their goods if we're all on the dole?

  • 37.
  • At 11:39 AM on 17 Mar 2008,
  • Howard wrote:

Couple of questions I want to ask.

1. Why the hedge fund pull out will affect the liquidity of Bear Stearns? Did they attempt to buy new shares issued by Bear Stearns or they were lending money to Bear Sterns or they bought some weird derivatives but failed to exercise it?

2. Who determined the $2 value per share? Do shareholder of Bear have a choice not to sell?

3. Why only JP Morgan want to purchase Bear Stearns? Surely this is an opportunity for other banks as well.

  • 38.
  • At 11:42 AM on 17 Mar 2008,
  • william meston wrote:

What is happening in Japan-the banks there have kept somewhat quiet-one questions the extent of their exposure to sub prime ?

  • 39.
  • At 11:43 AM on 17 Mar 2008,
  • Kenn wrote:

#23 Robert,
I refer you to http://www.uktradeinfo.com/index.cfm?task=topPartners the official HM revenue site.

Number 1 partner, Germany. No3 - Netherlands, No4 - France, No6 - Belgium, No8 9 & 10 - Italy, Irish republic,Spain.

Yes, the collection of countries we know as the UNITED States (each state/country having it's own laws) is no 2.

  • 40.
  • At 11:55 AM on 17 Mar 2008,
  • Pradeep wrote:

ALL DERIVATIVE, FUTURES and OPTION
1)product creation,
2)pricing and
3)trading
SHOULD BE FULLY RE-ASSESSED AND REGULATED.

It is only the city employees and the super rich who benefit out of all of this(Bonuses).

ALAN GREENSPAN once said he took note of the huge Sub-Prime leveaging but did not want to intervene as he thought it was only the super rich who were invested but I guess now he is proven wrong as we all suffer.

I apologise for straying off the subject at hand a little BUT, it's said that the best way to revive an ecomomy is war. It's funny how the US is involved in numerous wars right now, but their economy is dying a death. Could that be due to the fact that all the stolen oil money and redevelopment contracts are going straight into Bush's back pocket. There are alarming similarities with this story too. Let the tax payer pay for the mistakes and make sure the rich stay happy.

One thing is for sure right now, as the US economy is falling to pieces, the super rich are getting super richer.

  • 42.
  • At 12:16 PM on 17 Mar 2008,
  • Anon wrote:

I work in the OTC derivatives market and I remember when Warren Buffett said in March 2003 that derivatives were "financial weapon of mass destruction" which "could harm the whole economic system" and posed "catastrophic risk" with some of the contracts being devised "by madmen".

At the time I thought 'you silly old duffer. Sounds like sour grapes for getting your fingers burnt 2 years earlier'.

He'd be feeling pretty smug right now if he wasn't too busy counting his billions and buying up companies for a song.

See:
http://news.bbc.co.uk/2/hi/business/2817995.stm


  • 43.
  • At 12:22 PM on 17 Mar 2008,
  • John white wrote:

Kenn at 12

The US has helped the global economy since 1997 when many Asian economies tanked due to their unrealistic linking of their currencies to the US Dollar. There are few if any Chinese brands which are recognised in the global economy and much of the export flow to the US is from American companies operating out of China. However one Chinese brand of growing importance is the counterfeit be it cars, medicines, software, videos and anything else where intellectual property can be stolen. China apologists should stop avoiding the fact that the Government is managing the currency because it is scared of market forces. The huge global trade imbalances which should be partially corrected by currency markets cannot function if the Chinese government plays the currency board game. Lest we forget China wants the fruits of doing business with weatern democracies whilst restricting access to the internet and abusing human rights on an epic scale.

  • 44.
  • At 12:22 PM on 17 Mar 2008,
  • Scamp wrote:

What this tells us is that the so called Anglo-Saxon economic model much flouted by one G Brown esq as being the saviour of Europe because it would allow the private equity/hedge fund thugs free rein, is now well and truly dead.. All we have to do is make sure its firmly buried.

  • 45.
  • At 12:57 PM on 17 Mar 2008,
  • Peter Dough wrote:

Robert, the problems are deeper and wider than previously thought even if this particular threat of contagion has been headed off by Morgan’s knockdown buyout.

How many of our banks have put in bids for three day loans for the total presumably at this stage of £23.6bn?

How many major US investment banks and securities firms have market capitalisations less than the amounts they are finding difficult to value in their exposures to mortage-backed securities?

The reason Joseph Stiglitz has observed much of central banks' evasive action looks as effective as pushing on a piece of string is because they are not getting out there and supervising compliance and responding on the ground.

  • 46.
  • At 01:00 PM on 17 Mar 2008,
  • Gordon wrote:

Josiah Stamp, Bank of England 1920s..

"The bankers own the Earth. Take it away from them, but leave them the power to create deposits and with the flick of a pen they will create enough deposites to buy it back again. However, take it away from them and all the great fortunes like mine will disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers AND PAY THE COST OF YOUR OWN SLAVERY, let them continue to create deposits."

  • 47.
  • At 01:03 PM on 17 Mar 2008,
  • Jeremiah Harpur wrote:

If you look at the financials that are feelign the most heat, they are the ones which have had the most aggressive lending strategies. Leaving aside the more speculative investment 'banks', the key factor here is the loan-to-value (or loan to deposit) ratio. If I am using CFDs to boost my leverage in deals and the bottom follows out of my share portfolio, I have a problem. But my problem multiplied is a very big problem - like the multiplication of bias. If a lot of my 'assets' are linked to derivatives and my assets are declining a similar problem arises. The bottom line here is that the financial world has created very inventive ways for entities to raise cash without having to rely on traditional backing assets. Profit is generated from very very small margins hence the need for vast amounts to wager (and loose). The dilemma is how to provide liquidity when the 'best quality' assets are not what mom and dad put on the line when they bought their first house, car, corner shop, office, etc. This is a huge problem for the FED as all around it, are found highgly leveraged banks and funds teeming with dubious quality assets. The FEED will have to look at rates of around 1.5% very quickly to provide the stilts for the more viable banks to walk out of the mud. It is inevitable that several EU banks and funds with significant US exposure will travel to the bottom over the next few months - probably sooner. What is missing in the coverage (no fault of yours Robert) is pressing the simple point that entities are foldng because they cannot repay their loans. That is the alarmingly bald truth. The FED if it cuts radically will save a few waders, also it will temporarily help investors get a fillip on their shares - a tranisient peak - give some a chance to cut their losses. The crippled thinking of the ECB is very unhelpful at the moment. Fear of inflationary pressure, a historical anxiety in Europe, is not being matched by fear of dramatic asset write-downs (a much nearer reality). A strange and disturbing contradiction with inflationary concersn in the 70s. we are returnign at least in teh medium term to the times when cash was king.

  • 48.
  • At 01:16 PM on 17 Mar 2008,
  • Bob wrote:


This turmoil suggests the banks don't actually understand what they have lent and to whom and consequently the risks associated with the lending aren't understood.

It clear that the financial instruments that have evolved to reduce risk and thereby increase global trade and liquidity are build on weak foundations. They seem to have create a climate divorced from reality in the banking system.

Stage 2 credit gets significantly more expensive for society as a whole. It's looking increasingly likely that this crisis won't be contained in the banking sector until they understand thier financials positions accurately and are open about them.

Let's hope the flow of cheap chinese imports continues in the short term. Reasons why:

1. If they inflate our standard of living will reduce in the west as prices go up(first raw materials, already happening then the cost of the manufactured goods)
2. The reasons imports are cheap is because there are 10 people to every job so labour costs are low due to competition
3. How far would the rinimbi have to go up before the advantage of low cost labour have to go up before there's the parity of costs?
4. What can we actually sell and export to other countries?
5. What world class industries do we have?

Oh dear. I'm sure we do have world class export industries, but I'm not really aware of what they are.

Oh the City world class finance...ummmh problem here....oh dear...

Answers please.

  • 49.
  • At 01:18 PM on 17 Mar 2008,
  • John B wrote:

''I sold all my equity investments this morning and bought gold''

Ah, the good old 'sell low, buy high' strategy. Let us know how that works out, no. 26.

  • 50.
  • At 01:21 PM on 17 Mar 2008,
  • Mike Walker wrote:

I hate to think that hedge funds, their managers or holders, are going to be baled out in any way through this crisis.

They are wholly unregulated but typically carried leverage greater than banks. Controlling them through their prime brokers, which has been the UK way so far, is clearly inadequate.

Unbelievable levels of leverage and lack of simple transparency are core problems in the system, along with no contribution in the event of downside.

Haircuts at the neck are the only solution for the individuals, holders and managers - or there will indeed be riots - from the general population.

This is one instance where retrospective regulation is justifiable. Retrospective claims to the individuals' personal wealth should be opened up.
Otherwise, there will be popular disrespect - that could, in particlar, undermine the mandate of central banks.

I like capitalism; I dislike those who take beyond extremes.
people are kill it.
They have

  • 51.
  • At 01:22 PM on 17 Mar 2008,
  • Gerald Clark wrote:

WW3

  • 52.
  • At 01:23 PM on 17 Mar 2008,
  • tonyw wrote:

Of course all the prudent people here who have saved in pensions will be hit as the assets are marked down. Funny how Northern Rock is the safest bank to put cash.

Interesting how in some US states house loans are non-recourse, i.e. the lender can just walk away from the loan, aka jingle mail. As property prices continue going down the temptation must increase for more and more lenders to just walk away rather than trying to keep up with their payments. so the banks assets keep going down - we have a problem of solvency not liquidity.

  • 53.
  • At 01:25 PM on 17 Mar 2008,
  • John B wrote:

''I sold all my equity investments this morning and bought gold''

Ah, the good old 'sell low, buy high' strategy. Let us know how that works out, no. 26.

  • 54.
  • At 01:29 PM on 17 Mar 2008,
  • dd wrote:

I think John Thomas (#37) makes a good point.

China has a very small domestic market. As mentioned above, a substantial portion of its workforce earn less than $2 per day - so not much purchasing power there.

The Chinese and other BRICS economies will be hit by the downturn in the Western economies. However, from a central government perspective these countries are also "cash rich" so they may be able to cushion the impact of any downturn - certainly a lot better than the UK can.

The final outcome may not be the wholesale shift in economic power to the East - but there is likely to be an adjustment in the balance of that power.

  • 55.
  • At 01:33 PM on 17 Mar 2008,
  • r. gordon bennet wrote:

Bear Stearns:
the operative word is Bear

  • 56.
  • At 01:41 PM on 17 Mar 2008,
  • john thomas wrote:

What's the name of this creek again?

What's that smell?

ok...who's pinched our paddle?

Is this it then everyone? Is this the day that will be announced a crash?

I really cannot tell how much longer the fall on the FTSE can continue. How far down does it have to be to be considered a crash?

  • 58.
  • At 01:45 PM on 17 Mar 2008,
  • Johny wrote:

As an individual and having a finacial interest, I have been watching the Swiss Franc against the pound and watching house prices.
I am selling my Herts home to put into Swiss Francs since June 2007.
I have already dropped the price by 10% predicting house prices will fall by 25% by May 2009 and that the pound would fall to 1.6 swiss francs to British Pound by May 2009 from 2.4 in June 2007.
I now have got to the stage where I am not even sure if it is safe to sell the property and leave the monies in the bank as surely the banks are unsafe and the money will be worth nothing with inflation which would not be effected in house values so much over a 10 year span.

  • 59.
  • At 01:48 PM on 17 Mar 2008,
  • tonyw wrote:

Of course all the prudent people here who have saved in pensions will be hit as the assets are marked down. Funny how Northern Rock is the safest bank to put cash.

Interesting how in some US states house loans are non-recourse, i.e. the lender can just walk away from the loan, aka jingle mail. As property prices continue going down the temptation must increase for more and more lenders to just walk away rather than trying to keep up with their payments. so the banks assets keep going down - we have a problem of solvency not liquidity.

  • 60.
  • At 02:08 PM on 17 Mar 2008,
  • r. gordon bennet wrote:

Bear Stearns:
the operative word is Bear

Is this it then everyone? Is this the day that will be announced a crash?

I really cannot tell how much longer the fall on the FTSE can continue. How far down does it have to be to be considered a crash?

  • 62.
  • At 02:13 PM on 17 Mar 2008,
  • Liam Symington wrote:

To Mike Magoo, "lending of 125% to bad credit worthy individuals" was not the cause of the Rock's problems. As their auditors would probably vouch, NR have a healthy mortgage book, as 125% wasn't dished out to "sub-prime" borrowers.

NR borrowed from the BoE to continue trading, and although the taxpayer has assumed the liabilities of the Rock, it has also assumed its assets. I imagine that the tax payer will have a net gain from this shrewd move by Alistair Darling, so instead of critising the government for exposing the taxpayer, we should critise them for robbing the shareholders in some Kremlin style manouvre.

  • 63.
  • At 02:14 PM on 17 Mar 2008,
  • DaveH wrote:

#22: "No3: The USA is probably our biggest trading partner - your seem to suggest it is the 'euro area' which as we all know (no matter how many would like it to be) is not a single country, but a currenty unit."

As you can see above, that position is held by Germany, but more importantly, the Eurozone (ie: without UK) is now bigger in economy size than the USA. That should tell you something about how UK should shift its emphases (not least in military adventures) in the future and why we should join the euro (granted we cannot do it now as we are messed up with a housing bubble - erm, like the US).


  • 64.
  • At 02:19 PM on 17 Mar 2008,
  • Ian wrote:

Apart from worry or sentiment, is there any reason that Sterling is taking such a hiding at the moment. Interest rates remain higher than Europe and the US, and there is no sign of them going down. Is this a short term trend or is there something even worse for the economy that we can expect to happen fairly soon and that currency experts are already guessing at?

  • 65.
  • At 02:20 PM on 17 Mar 2008,
  • David Stevenson wrote:

FAO ROBERT PESTON;
Are you not unfair to the BOE when you write above -
"To digress for a second, the state-subsidised rescue of Bear Stearns is remarkably similar to the plan for Northern Rock to be acquired by Lloyds TSB last September, which was backed by the Financial Services Authority but rejected by the Bank of England and the Treasury."

Is the phrase "rejected by the BOE" correct?
From Your interview late last year is this interesting para:

Mervyn King, the Governor of the Bank of England, is interviewed by Robert Peston, BBC Business editor

RP: Northern Rock and members of the Treasury Select Committee have said you weren’t consistent. The weekend before the provision of the lender of the last resort facility, Northern Rock was in negotiations with Lloyds TSB, to sell itself to that bank. But that a condition imposed by the potential buyer was that the Bank of England should guarantee that if certain funds were withdrawn you would replace them. And you refused. Then only a few days later you provided support to Northern Rock. Why wasn’t that an example of double standards?

MK: Well that’s not what happened; let me tell you what happened. On the weekend before we granted the facility to Northern Rock, I was asked whether if a certain retail high street bank were to make an offer or a bid for Northern Rock whether we would be prepared to lend that bank 30 billion pounds, at the bank rate, for about 2 years. And I think what that did was to demonstrate that our original view that it was not possible to save Northern Rock without a large injection of money on that scale was clearly right and I understand perfectly well why the bank wanted that facility. But I said to the Chancellor: “Well look this is not something which a Central Bank can do, they don’t normally finance takeovers by one company for another let alone to the tune of 30 billion pounds, which is rather a large amount of money.” So I said: “This is a matter for government, but you have to recognise that if you were to make available such a facility to one bank, you would have to make it available to any other potential bidder and therefore it will become public.” And I don’t think it took the Chancellor very long to recognise that not only was this something which Central Banks don’t do, it’s also something that governments don’t do.
BOE having been removed from a primary regulatory role by Gordon Brown in 1997, gave the oportunity, as curently in the FED's case for prompt Government action.

  • 66.
  • At 02:25 PM on 17 Mar 2008,
  • WillS wrote:

Robert Said: "But what should alarm us over here is that the one currency that hasn't strengthened against the dollar is our own, sterling."

This is a little bit of an oversimplification.

Just because the Euro is strengthening against the dollar and the pound isn't doesn't make us the only cause for concern in Europe.

The market is simply unable to express concerns over many European (Euro) economies via the mechanism of exchange rate variations as the Euro-zone effects are being mitigated by a strong German position. France, Spain and Italy all face a similar situation to our own.

  • 67.
  • At 02:33 PM on 17 Mar 2008,
  • Liam Symington wrote:

To Mike Magoo, "lending of 125% to bad credit worthy individuals" was not the cause of the Rock's problems. As their auditors would probably vouch, NR have a healthy mortgage book, as 125% wasn't dished out to "sub-prime" borrowers.

NR borrowed from the BoE to continue trading, and although the taxpayer has assumed the liabilities of the Rock, it has also assumed its assets. I imagine that the tax payer will have a net gain from this shrewd move by Alistair Darling, so instead of critising the government for exposing the taxpayer, we should critise them for robbing the shareholders in some Kremlin style manouvre.

  • 68.
  • At 03:08 PM on 17 Mar 2008,
  • Scamp wrote:

I'm glad someone else has raised the point about the £/$ rate.... Well done Robert. This has been niggling me for some time.

We all know of course that we are too dependent on the financial sector but what exactly do you suggest we do about it when we have a Govt that believes the City can do no wrong and that every other sector is unimportant.

  • 69.
  • At 03:25 PM on 17 Mar 2008,
  • Joe K wrote:

I think with the pound falling against the euro quite considerably that it is now the right time to have a referendum about joining the euro.

I would like to see a Panorama program about the pro & cons for the UK joining the Euro currency.
I think it certainly would help trade and with the global economic downturn we would be stronger being part of the 27 country strong Euro Land.

One thing that my scupper this is the goverments very high level of borrowing (national deficit) which may restrict us.

I would like to hear what other people's views are on this.
Joe

  • 70.
  • At 03:28 PM on 17 Mar 2008,
  • GeoffS wrote:

Hi Robert,

Are these posts to be used in your forthcoming books, "How I watched the plummet of western civilisation" and "International banking for dummies"?

On a more serious note how does it feel watching the world's finances being sucked into a black hole from your lofty position? As a mere ignorant minion, I'm scared stiff. So you - being in possession of some facts, much rumour and knowledge - must be really terrified about what could be around the corner. (obviously ignoring that earlier post about emotional vs rational response)

  • 71.
  • At 03:29 PM on 17 Mar 2008,
  • Joe K wrote:

I think with the pound falling against the euro quite considerably that it is now the right time to have a referendum about joining the euro.

I would like to see a Panorama program about the pro & cons for the UK joining the Euro currency.
I think it certainly would help trade and with the global economic downturn we would be stronger being part of the 27 country strong Euro Land.

One thing that my scupper this is the goverments very high level of borrowing (national deficit) which may restrict us.

I would like to hear what other people's views are on this.
Joe

  • 72.
  • At 03:30 PM on 17 Mar 2008,
  • Sam Keays wrote:

For whoever said war aids the economy: only in cases of 'total' war in which the vast majority of a country's institutions, population and resources are focused together on it.

  • 73.
  • At 03:31 PM on 17 Mar 2008,
  • Ian wrote:

INFLATION

Why so few mentions of the word? This is all creating enormous inflationary pressures in the US and UK, which we will start to see over the next 6 months.

When inflation hits 10%, how can banks hold interest rates down? That will just wipe out everyone's savings (which means pension funds for most of us).

  • 74.
  • At 03:57 PM on 17 Mar 2008,
  • Stuart R wrote:

The *pound* has hit an all-time low against the euro today (March 17) but (as at 15:15) there is *not a single mention* of this on the BBC webpage.

The lead story is all about the dollar's all-time low and how much trouble the US faces.

The US story is clearly important; but it's surely not as important as the fact that the British currency is being totally spanked as well.

The fact the markets are taking an all-time negative view of sterling versus the euro is newsworthy, surely?

Why the wall of silence from the BBC?

Is the Beeb toeing Gordon's line: that the state of the UK's economy is all the fault of the US capitalist pigdogs, and nothing to do with Labour mismanagement?

  • 75.
  • At 04:27 PM on 17 Mar 2008,
  • Edgardo wrote:

Is this the price we (taxpayers) pay for having deregulated the financial industry?

  • 76.
  • At 04:41 PM on 17 Mar 2008,
  • Danny wrote:

#39 and #59, you need to learn to read. The spreadsheet you are quoting is for IMPORTS to the UK, in terms of whom we are EXPORTING to then it is the US by a long-stretch even after taking into account the plummeting USD/EUR rate.

  • 77.
  • At 04:51 PM on 17 Mar 2008,
  • Darren wrote:

To put a mildly optomistic spin on events at least we can see the beginning of the end of a very dangerous bubble.

Bubbles always burst at some point as was witnessed with the DotCom bubble of 2000/2001, but the bubble has led to an industry that was able to re-group and build for the future with prudent management and real financial success - as witnessed by the recent sale of BEBO to AOL.

What the financial sector needs is a dose of common sense and prudent management so that it can learn from this latest lesson and understand that customers can only borrow so much at any given time before they break.

For too long our economies have been based on too few variables - mainly that of housing and consumer spending converted into debt instruments that had no right to be profitable - and we are now seeing the full scale of the financial sectors folly.

It may not do us harm in the long term to see some reality creap into the markets and also some fresh, innovative leaders in the financial sector as was witnessed at the end of the DotCom crash.

This current lesson will be painful but it may just prove the turning point in understanding that an economy needs a broad and balanced base from which to grow and not the paper thin substance it has been surviving on for some years.


  • 78.
  • At 06:06 PM on 17 Mar 2008,
  • steveh wrote:

Wasn't it Adam Smith who said that all wealth was created from Land, Labour and Capital? And by Capital he meant machinary, tools and buildings. Not CDOs and other Derivatives peddled by the banking and financial services sector.

You have to wonder if all the banks were to disappear overnight and be replaced by a new banking sector of much smaller size that just supplied old-fashioned savings and loans services, whether the nation's actual ability to create real wealth would be affected in the slightest.

The whole concept that the the Financial and Banking sectors were the driving force of the economy was always a complete con. They may have had a huge turnover and created massive profits for themselves, but then so does organised crime in various parts of the world. Seems like an interesting comparison.

  • 79.
  • At 08:10 PM on 17 Mar 2008,
  • david geals wrote:

House price since 80s been rising far to fast,meaning that we have removed the bottom rungs of the property market,this has now lead to it collapsing.

and every other week now America has had to come in and bail out company,s at a cost each time,wont be long till they cant do nothing. And maybe the eastern markets will prosper and hopefully equate the wealth between east and west.

  • 80.
  • At 09:07 PM on 17 Mar 2008,
  • Dave wrote:

The corporate robber barons who have created this economic mess will walk away with billions in their back pockets while the average investor, pension holder and mortgagee will pay the price for many years to come. Those responsible for this mess are criminals who should be held to account and their assets seized and redistributed to their innocent victims.

  • 81.
  • At 09:11 PM on 17 Mar 2008,
  • matt presland wrote:

America in meltdown,for me they have allways made new rules to suit their needs financial or otherwise.same as it
ever was.we caught the cold from them because we are in the same bed. Its time to restore confidence in the system but its all gone too far.If you cant pay your debts then you cant borrow.On and on I could harp but its simple as we all know, America in meltdown and think of it hundreds of billions.

  • 82.
  • At 09:15 PM on 17 Mar 2008,
  • Ian Baker wrote:

what a well written article. And as one person has said, it's going to be dark for a couple of years. There has always been an economic cycle , but this was has been postponed by over spending on the back of wealth related to feel good factors on property. And the worst of all, Banks lending money with such loose terms it was frightening. So, the pay back for this is it's going to be very tough. Big house price corrections, debt demands with people bleating it's not my fault, no one told me...yeah right, didnt think that whilst spending what we didnt have, and a slow down, job insecurity and inflation high. Wasn't it GBrown who changed the measure of inflation to keep it lower?? and what of all the people on benefits , becuase this government will have to stamp down on this too. the free ride is over. and there won't be any shoulders to cry on. And when a Bank the size of Bear Stearns goes under, we should be wide awake to how bad this is

  • 83.
  • At 11:32 PM on 17 Mar 2008,
  • Nat wrote:

It's funny to note that so many people blame the bankers of being greedy, and complaining that it is the general public who footing the bill. But did not we, at least most of us benefit from this boom one way or the another? What about booming house prices? did not the owners cheer it up and demand a house bought for 70K to 210K in just 3 years time? Did not we happily bought a laptop or a computer cheaper than a year before b'cos that was made in China or elsewhere? Were not we happily watching the share prices go up and gleefully accept the dividends?? Show me a house owner, who was not happy about ever increasing house price. I agree with the first poster, that China is somewhat responsible for this crisis. But they are not the only culprits. They intentionally, and artificially held their currency value low, so as to affect the financial equilibrium. But the same time, western govts, particularly UK kept taxing businesses to a high level, eventually leading to all the manufacturing base disappearing from this country. And they all moved to the east. Brown talks about service based economy. But I dont understand something very simple. In a country, if everybody is a service provider, who is the buyer??? The economic policy of western govt. long since divorced from reality, and now we all are paying the prices. All our things are made in china, and the money goes there! From my point,the problem is not only the making of the banks, but it is the political system, and wrong policies that is dooming us!

  • 84.
  • At 01:15 AM on 18 Mar 2008,
  • Peter Jones wrote:

As a British expatriate living in US and working in the real estate development world, and as a former Economics college tutor; maybe I have some special insights.

It is a delight to read the intelligent comments from that side of the pond, and i nearly died laughing at #42 that Warren Buffet is amazing. And all the hype about derivatives to get rich quick, and REIT's (now scorned)

I cannot understand why UK does not go European and euro, is it vanity ?

The US economy is very resilient, and there is pent-up demand for housing.

The crisis is in confidence, fueled by the media hype. If the media tried to educate the public about the economic issues instead of focusing on Britney Spears underwear, that would help.

In the statistics such as from UN and CIA the US is cited as a major trading partner of UK, but not first or second. And if you add up the euro countries trade balance with UK the US pales by comparison

  • 85.
  • At 06:34 AM on 18 Mar 2008,
  • Geoff Brown wrote:

Perhaps it is now time for the Fed and other similar bodies to refrain from trying to turn back the tide that is engulfing the financial markets and to force those responsible for creating the credit crunch to bite the bullet and get on with solving the problem they created.

The sooner that happens the sooner we will get to know the true extent of the problem. Then proper plans can be put in place to bring about a recovery in the money markets.

Unless and until that happens, the spineless, grossly overpaid, people who are supposed to be running these large financial institutions will continue to wander around in a daze hoping that the problem will go away of its own accord or someone else will come to their rescue.

Unfortunately too many of us have been deluded, for far too long, into believing that it is possible for banks and hedge funds etc. to make our savings grow "ad infinte um" and we can should expect to live off the interest without touching the capital.


  • 86.
  • At 07:45 AM on 18 Mar 2008,
  • Mike Magoo wrote:

To Liam Symington,

Its nonsense that NR was conservative with its lending. It expanded from nothing to 20% of the market over 2006,2007 (yes - 1 in 5 uk mortgages) of the mortgage market with is MAIN product being the together 125% mortgage during the peak insane house price period!

You seroiusly think 20% of the entire market were hard done by creditors who just happened to be turned down by everyone else?

The lunacy of putting the taxpayer on the line for these defaults is shocking.

  • 87.
  • At 11:10 AM on 18 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Re: #1 john

One of the major problems which must be corrected is the value of the Chinese Renimbi against the US dollar. China is a major beneficiary from open markets but it gains an artificial comparative advantage by managing its currency. The G7 should not hesitate to slap import tariffs of 20% plus on all Chinese goods unless Beijing stops acting like an unreformed planned economy.


Be careful what you wish for. It is already looking very likely that the UK and US are entering into a period of higher inflation: insisting that products from "The World's Manufacturer" cost those countries more really isn't going to help the situation.

It isn't a liquidity problem. It's an insolvency problem.

On liquidity traps and much more:

"The idea of a "liquidity trap" flows from a Keynesian approach to economic/monetary policy in the belief that there is not enough money in the system and things would somehow be better if more money could be forced into the system.
..
There are major problems with this thinking.
..
Throwing money at the problem simply encourages more overcapacity, weakens the currency, and causes prices of necessities like oil to rise while not doing a thing for wages. If dropping money out of helicopters worked, Zimbabwe would be the greatest economic force on the planet."
http://www.minyanville.com/articles/Bernanke-Fed-economy-liquidity-Stimulus/index/a/16313/from/yahoo

Happy trails

ed

What To Do About The Liquidity Trap
..
Here's what to do about the liquidity trap: Nothing. The concept of liquidity traps is imaginary. Home prices are too high, they need to correct. There are too many houses and stores so we should not encourage more building. Savings should be encouraged, not discouraged. Overcapacity needs to be worked off not fueled. Bankruptcies are part of the solution not part of the problem.
..
The real trap is doing something as opposed to nothing. Quantitative Easing and ZIRP did not help Japan and they will not help the US either.

Billions wiped off shares ?

Money is neither created nor destroyed - it just changes hands.

  • 90.
  • At 10:27 AM on 19 Mar 2008,
  • Jeff Gray wrote:

'Credit Crunch' is a misnomer. What we are experiencing is a Debt Crisis. The credit crunch has come because there is a failure of confidence. People no longer have confidence that the mountain of debt built up over the years is resting on anything tangible and are refusing to roll over that debt. The result is the debt issuer will have to redeem the debt with cash!

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