Meltdown Monday
There has never been a weekend like it in my 25 years as a financial journalist.
For Wall Street, it has probably been the most extraordinary 24 hours since the late 1920s.
As I said would happen yesterday evening, Lehman has announced that it is filing for bankruptcy protection under Chapter 11.
To prevent contagion to the next most vulnerable investment bank, mighty Bank of America is buying Merrill Lynch for about $50bn.
That Merrill is steering itself into safe harbour, no longer confident of its future as an independent, is almost as shocking as Lehman's demise.
And one of the world's biggest insurers, AIG, is reeling from losses on its exposure to real estate and credit default swaps, or complicated financial insurance - and, according to the New York Times, is seeking a $40bn bridging loan from the Fed.
As for the US central banking system, the Fed, it is endeavouring to minimise the damage to the financial system from these shocks by allowing securities firms to swap shares for short-term loans, to tide them over.
The Fed is also increasing by $25bn the amount it is prepared to lend to bond dealers.
And a group of 10 banks, including Citigroup, JP Morgan and Goldman Sachs, have created a $70bn collaborative fund, to try to prevent market liquidity from evaporating in the coming anxious hours.
The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence.
In a way it's fortunate that most Asian markets have been shut today. But the dollar has inevitably fallen in what little trading there's been, Australian stocks have fallen, and futures prices are pointing to a very weak opening on Wall Street.
For most investors and bankers anywhere in the world, today will be a day to endure and survive.
UPDATE, 11:30AM:
Probably the most positive development in the past 24 hours is that 10 of the biggest US banks are pooling their cash in a collaborative effort to prevent any of them running out of funds in an emergency.
Each of them is contributing $7bn and each can borrow up to $23bn from the common pool.
The members of this liquidity consortium include our own Barclays, along with Citigroup, Goldman Sachs, JP Morgan, UBS and others exposed to the fallout from the collapse of Lehman.
The initiative represents an outbreak of common sense among the banks - because in this time of chronic market dislocation, it's a way of ensuring that cash gets to where it's most needed.
The crisis in the global financial economy doesn't stem from their being too little cash in aggregate. It's simply that much of it isn't where it's most needed.
A useful analogy would be Eric Morecombe's protest to Andre Previn in the classic sketch that he was playing all the right notes of Grieg's Piano Concerto, but not necessarily in the right order.
It wouldn't do any harm for the US cash cooperative to be replicated over here by our banks.
There's a time for cut throat competition between banks, and this probably isn't it.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~50~RS~)
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It's been interesting watching this whole episode unfold from the relative (and I use that word cautiously) safety of the Australian financial system. Whilst there has been impact to date, compared to the fallout in the US and UK it has been relatively small beer.
The interesting thing now will be to see how far the ramifications of the failure of a top tier bank rumble through to areas that to date have been fairly unscathed. I think this will be another one of those days that we will reflect back on in the future.
I also spare a thought for all those people that basically have lost their jobs today. There has been a lot of vitriol towards the fat cat bankers and their ill gotten gains, but the reality is that these institutions employ people from all walks of life, most of whom take home a normal salary to pay for the mortgage and all of lifes other expenses, I hope the world treats them a little more kindly and helps them to find alternative employment.
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It's becoming the norm to blame these problems, this and the takeover over Fanny Mae etc last weekend, on the difficulties in the US housing market. But the problem is actually foolish lending - lenders should not lend to people who cannot repay. The US subprime problem is a problem created by lenders. And then exacerbated by securitising the loan books, thus contaminating good loans with bad.
The underlying economies are the same as they ever were and it is the bankers who have caused such havoc on the financial markets by their foolish behaviour.
They now need to be brave, and get back to lending to each other, or more will collapse.
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Worst in 25 years of reporting, meltdown Monday lets see where Pestons prediction are when wall street closes tonight.
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In 1997, we dumb Asians listened in abject humility as the "wise" men of both IMF and the World Bank lectured us what a sound financial system should be like. These guys went so far as to brand Malaysian PM Dr. Mahathir an incompetent Finance Minister who practised voodoo economics.
So how now? Any wise advices for the incompetent US Fed Governor and Secretary of the Treasury. Looks like the USA government will be in the public housing business soon as it takes over all the outstanding mortgages.
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"tied" them over? Tut tut Robert. Back to spelling class I think.
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The moment that a group of bankers put together a 'collaborative' fund of $70bn is the same moment that someone else will decide to speculate against them. The fund won't fix any fundamental problems with the system so it won't be enough to halt the revaluation of everything in the system. This is a Canute-ish move!
If I remember correctly from reading Galbraith's 'Great Crash' similar moves were made at that time but it will fail again, this time, because the dogs of Wall St don't know the meaning of the word co-operation.
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Obviously we should feel sorry for the little people - those clerks and receptionists who did not share in the massive bonuses earned by their superiors.
But I have not one shred of pity for those at the top. Even if they lose their jobs most would have salted away a large part of their gains, even if their share options have become worthless.
People don't seem to realise how serious this is. I am fully expecting a complete meltdown of the world's financial systems this week.
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I imagine that this blog will be one place where this ongoing unravelling of the global finance system isn't a complete surprise.
Unlike various official commentators who have repeatedly called the "bottom" of the crunch, the market, the downturn or whatever aspect they are talking about.
It will be interesting to see if the commentators proposing October to be the bottom of the Equity market ( quite a few newspapers had this identical line over the weekend) and end 2009 being the nadir of the property market are correct in their predictions
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#4, sizzlestick, if you happen to have any old
books on "voodoo economics" lying around,
could you please post them on the web?
Our incoming administration might need to
come up to speed in a hurry.
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Despite having an enourmous amount of sympathy for the "normal" staff of these troubled banks I never the less feel that the companies are getting what they deserve afetr years of fleecing the public and world in general. Although in the main their dealings have not been aimed at the man in the street the effect on this man has been clearly seen by the despicable and greedy actions of the bank and individual "bankers".
They are getting what they deserve and frankly I have little sympathy for the immoral banks and banking system!!
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Hopefully Banking will go back to basics.
If they have common sense they will desist from creating exotic Bonds built on complex mathematical models.
Banks should just raise money through Deposits, Shares, and Bonds secured just on the Bank and then lend out the money themselves with no middlemen.
It would be worth closing the ratings agencies perhaps creating one National or International ratings agency perhaps connected to an insurance fund to guarantee any securities they have 'judged' sound.
It would be wise to curtail Stock Lending, so agents cannot profiteer from lending their clients Shares.
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The markets have been predicting for months a major US bank failure, now we have it.
So if stockmarkets have been pricing this in then, yes, after some volatility maybe this will be a corner turned.
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Whilst there will be short-term and serious turmoil from the bankruptcy of Lehman Brothers and the capitulation of Merrill Lynch, perhaps this is the beginning of the end.
The two most remarkable features of the investment banking business have been:
1) Lack of accountability to shareholders and the grossly disproportionate share of profits paid to employees rather than to those who have provided capital;
2) The risks employees were willing to take with the money of others for their own gain.
It is this lack of accountability and interest in the long-term value and viability which encouraged poor risk management, the results of which we are seeing today.
Potential investors have looked at Lehman and walked away from the unattractive proposition, and , more than any other group, it will be the employees who will suffer. On a personal basis this is sad but overall it is a good thing. The pool of unemployed bankers and the redundancy fears of those who remain at surviving institutions will allow the restructuring of these businesses and their remuneration schemes so that they are run in the long-term interest of their owners rather than the short-term interest of employees.
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The Telegraph (according to Today -BBC Radio4) says that the problem was created by too low interest rates - something I have been banging on about fro a decade to the BoE - (although I am an outsider and thus totality insignificant in global banking!)
I also thought it was a bit rich of Alan Greenspan coming on the Radio 4 (same programme) and saying it is a once in 50 years or once in 100 years problem.
It is impossible not to put these two 'facts' (opinions as ignorant as mine!) and conclude that Alan Greenspan's policy of low interest rates was the cause of the problem that we have today. I fail to understand why he (Alan Greenspan) did not understand this at the time and cannot see that he is responsible now. (He was after all the chief global architect of low interest rates.)
The quite obvious and inescapable answer is to have higher interest rates as a long term policy.
I have no solution to the present problem other than to let the market crash if that is what it wants to do, as any kind of intervention is both financially impossible to fund and a pointless waste of public money that will be better spent funding soup lines.
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Come on Robert, "In a way it's fortunate that most Asian markets have been shut today."
This plus the Republic Convention is safely out of the way, then Paulson decides to play "Hardball". Come on boy, even you don't believe this is down to the "law of coincidences"!!!
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I think the world should be pleased about this and hopefully many more to banks and financial institutions will follow. It proves the old maxim: 'property is theft'. Hopefully we can all realise finally that allowing credit is very bad generally and it ruins rather than improves lives. We should all now move away from excessive hours of work as slaves to the materialistic world; learn to have much less in the material sense and gain much more in our social lives; so much work is good but much beyond 30 hours a week is bad and should be outlawed in the world especially the EU; then we could not afford the credit which is obviouly so bad for everyone as we are yet to learn; pay for what you need and the rest does not matter; people are more important than things which the Western World has become addicted to. Long live the revolution!
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Robert,
Lehmans used marks of mid to high to thirty cents in the dollar for its sub-prime and A2A exposure last week. Merrills sold CDOs at 22 cents in the dollar. The market seems to be saying these prices are realistic.
AIG and some others seem to be more hopeful (less realistic). If you value the portfolios of AIG and other walking wounded at these rates what does it do to their capital needs? I'm not surprised that AIG are alleged to have asked for a $40 bill emergency facility from the Fed.
WSJ.com has a posting which is sobering: http://online.wsj.com/article/SB122144512332634941.html
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I'm not clear who actually loses when Lehman goes bust. Is it the funds of wealthy investors that disappear, or US tax payers money if the US giovernment guarantees investors, as ours does? Please explain
roger luther
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spelling ...
it not "tied them over"
it's "tide them over"
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"The value of your shares can go DOWN as well as up" ... looks like we will be testing the "Down" option in the next few days.
#2 has hit the nail on the head ... a bonus that motivates folks to sell regardless of the fact that those they sell to cannot pay is a road that leads us into this financial hell ... the day of judgement is upon us.
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can someone please explain what this section 11 is about? what will happen to the employees in the meantime - will they get paid?
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The big shake out in the worlds financial markets and banking systems that many people prophesised would happen, now appears to be a step nearer.
In that case we could see a number of big banks both here and elsewhere go belly up.
If that happens it will be a real test of the central bankers mettle and the central banks reserves.
The effects could be quite sobering for all of us and in some cases quite brutal.
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How much will the value of the Dollar fall by ?
Are we talking three, four or five Dollars to the Pound ?
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So the brown sticky stuff has finally hit the fan and is about to be redistributed far and wide.
I asked the question as to when will this end last Friday. There is no doubt that the begining of the credit crunch has now ended and we are about to start the meat course. Rare or well-done is immaterial.
What will be left standing by the time we get to the hard cheese is in the lap of the gods.
The ramificiations are going to be quite fundamental to our society, how we see ourselves and how we behave in the future.
All we can do now is to keep an open mind and try not to panic.
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#5 - pedantry won't solve the credit crunch.
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that's an exciting start for a Monday.
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Of course, this will take time and a lot of our money to clean up.
But on the other hand, there's nothing worse for markets than a drawn out saga, so it is good that Lehman's is out of the frame. Now that it is history, we can draw a line under it and move on. It?s been a drag for long enough.
Another pleasing aspect is that the shareholders presiding over this debacle have lost all. Merv must be pleased - investors will be less eager to pour money into lousy ideas in future.
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Mr Peston: "to tied them over." - You mean, "tide them over".
Your reporting remains a sane window into this unbalanced world.
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i have long believed that a large part of this problem has been the media feeding frenzy "The only news worth reporting is bad news"- which in this country has been led to a degree by Mr Peston who appears to be trying to "make a name" for himself. Had anybody heard of him prior to Northern Rock?
For somebody who thinks he leads the world in predicting who is going down next, led by his grandiose claim this morning "As i predicted yesterday" - its worth looking at what Mr Peston predicted last wednesday Sept 10th and i quote
"But, for the avoidance of doubt, this firm is not bust nor seems in imminent danger of collapse".
Oh dear Mr Peston - perhaps your degree in hindsight is not a first class one after all!
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'Meltdown Monday' - thats funny I just heard a 'Today Programme' interview from barclays HQ AFTER the stockmarket opened and the guy was adamant that there was no way it was a Meldtown.
Yes the stock market has opened 150 points down - but then over the last 12 motnhs thats not unusual.
I think on balance, due to the continued doom of your reports for 12 months; I shall give the benefit of the doubt to the chap from Barclays who was - as a banker, (as opposed to a Jouralist) able to put a bigger picture.
Interestingly one of your doom reports claimed (and I dissagreed with you on here) mortgages will not come down in price; every onth sicne you made that claim - they have done. Even last week they came down again.
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You certainly predicted this event 24 hours before it happened but, you know, Lehman's demise didn't happen yesterday, it has been happening over the last few years, with the explosion of derivative debt and the sheer criminal behaviour of too many people, aided and abetted by an incompetent and corrupt US administration. The alarm bells should have been ringing at least five years ago, but as long as everything seemed to be skating along nicely, no-one noticed that, just as in the Arctic, the ice was becoming dangerously thin. There were some old fashioned and much derided economists sounding the warning signals, just like the climate scientists, but I'm afraid far too many people were too busy enjoying the good times. Too late now. We should have dealt with all this long ago, and to be honest I'm not that impressed with a 24 hour warning. However, to be fair, I haven't read this blog previously, perhaps you were predicting this collapse some time ago, but if you were, then the vast majority of your colleagues weren't.
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So Peston has ben in the business 25 years so should know better if he really knows the market.
There are trillions yes trillions of dollars just waiting on the sidelines to move into the market.
This is wht they have all been waiting for and wanting, capitualtion / contagion now they have it the market will take off and the bulls will run.
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Some basics
We do not grow an economy by increasing spending with money borrowed that we cannot pay back or by doing each other's washing
Bankers do not add value by lending each other money or overlending to customers and should not get bonuses until the bank gets its money back and so has earned its profit
A risk can be shared but the initial risk premium is the maximum amount of money that can be shared by the risk takers
Value is created fundamentally by making things- our young people should be inspired to become engineers and scientists not investment bankers-lets get a pay structure that does this.
The current mess is a golden opportunity recallibrate and put the world on a sensible and sustainable footing- but that means we will all have to change some of our behaviour- sadly there will be a lot of pain before we get there- and we may just come through without the pain and return to being ostraches
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This is the old adage buy when eberyone is selling so buy buy buy now when the market id down.
Meltdown Monday Peston Bradford and Bingly who are a bank shares are up today and have risen 10% in the last 30 minutes.
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The "wisdom" of the likes of Ronnie Reagan, George Bush sr,, and George Bush junior, is coming home to roost. Even as the election for president of the United States goes on, the die hard republican right in the US champions less taxes on the wealthiest americans, and less regulation of corporations. It wouldn't take much of a leap of faith to assume that these idiots intent is to see this wonderful country collapse. The C.E.O.s of these failed institutions will undoubtedly walk away with tens of millions more of taxpayers money as compensation for a job destructively done. I guess this is proof that corporations need no rules? Are these bailouts evidence of "small government"? The irresponsible "children" who have been running these banks should be locked up for life for they have proved a threat to all our lives.
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Correction.
Bradford and Bingley are up 20% from their low at the open.
Peston.
Understand investors have been waiting over a year for a day like today.
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To averywiseman on post 2
"the underlying economies are the same as they ever were"
possibly right but how good were they in the first place.
Also this boom created by the idiot bankers created much vastly higher tax receipts for Gordon Brown.
And what did he do with them?
He spent them all hugely increasing the public sector without giving a damn as to how well spent the money was.
An intelligent man would have recognised that this boom wouldn't go on forever and would save money for when the inevitable downturn came.
In fact stupefyingly more was borrowed (not saved) to commit to even more public spending on the basis that we would be able to pay it back out of our ever increasing tax receipts, which was down to the fact that bust had been eradicated. Yeah right!
Now consider the fact that on AD projections of over 2% growth in the economy we are going to breach our borrowing limit.
What are the consequences going to be to our tax and spend when tax receipts fall.
People are now spending more of their money on Gas and food.
There is only 5% VAT on gas and 0% VAT on Food. Government receipts go down.
Unemployment is increasing therefore less income tax being paid at the same time as job seekers allowance is increasing.
Less stamp duty receipts
The list could go on nearly forever.
The penny has now dropped with the government as shown by their treatment of the police over their pay rise and the request for only 2% pay rises for public sector employees.
What happens to individuals and companies when they have less money coming in than going out?
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"Render unto Lehman the things which are Lehmans."
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Unfortunately hearing the news of the failure of Lehman was not a surprise and the "rescue" of ML by the Fed might be akin to a drop in the ocean-how many more banks can be rescued?
I only hope that we do not see a domino effect in the coming weeks and months where more banks are forced into the same position and the security of deposits jeapordised.
While it is fashionable in some circles to gloat at the situations the "Fat Cats" now find themselves in, it is worth bearing in mind that the happenings in financial markets ultimately affect us all in one form or another-should that be in lower values for our pension funds or ISAs or in the higher rates we pay for our mortgages.
Irresponsible behaviour and no doubt greed may have got the markets into this situation but only prudence and a perhaps few years of pain may get us out the other side. There may be no option but to sit this one out and this "correction" - albeit very painful-will probably result in a healthier financial market and better practice in the long run.
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There is a vast amount of money flowing around the world, just because a private investment bank like Lehmans has gone does not really amount to a hill of beans.
This is just another opportunity for the "players" on the inside to make a lot of money for themselves whilst using other peoples money. Tails they win heads you lose. In the real world of small business devoid of million pound "contractual payouts"(see recent BS takeovers) the banks have always been happy to lend you ten quid as long as you secure their ten quid with fifty quids worth of assets. Nothing has changed apart from the fact that the banking "stars" have been shown to be overpaid con artists, something small business people have known for years.
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Nobody said "property is theft". What they said was "Capital is the accumulation of previously expropriated surplus wage labour". The recent banking events have nothing to do with Mr. Marx's analysis, which was about manufacturing and craftsmen, not banks. What banks aim to do is to fleece ordinary customers (e.g. read the UK's FSA report on HSBC - charging 30% interest and mis-selling Repayment Insurance), and then speculate with that money. Speculation is risky. Not all risks pay off.
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It is not just bad lending it is also criminal fraud in borrowing both parties should be taken before the courts.
The resulting jail sentences will result in so many new prisons needing to be built it will rejuvenate the building industry in the USA.
The were quick enough to jail Lord Black, lets see some of these American fraudsters in jail as well, both bankers and other fraudsters.
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It is pretty obvious that the Fed do not expect Lehman to be the last to enter the casualty zone. If Lehmans was seen as the last act in the play it would have been propped up and the curtains hurriedly drawn.
If so the problem is what is going to unravel over the next few months. It would be nice to think there was a prospect that a US ecomonic recovery would occur in 2010 but the impact of this lot could take a lot longer to unpick.
I doubt they will have done the books on Lehmans by 2010.
The chickens are coming home to roost but the chickens are the size of King Kong.
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"tied them" - typo or psycho slip?
Pam,London
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Does anyone else think that this problem with the US sub prime mortgage market had it's roots in the stimuli applied to the financial system by the US government in the wake of 9/11.
The US Government urged people to go out and spend money to prevent a recession and reduced the interest rates to fuel the economy. The US mortgage brokers signed up people for mortgages that never had a chance of repaying the loan when eventually interest rates went up.
There is no way out of this in the short or medium term.
A quote from the film "Good Morning Vietnam" which tells the story of another American disaster
"It's all one big sh.t sandwich, and we've all got to take a bite"
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Mammon has a terrible bite and an insatiable appetite!
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Reading all these posting is interesting. All these very experienced bankers, the real problem in banking is not the system but the people behind the system. 95% of employees in banking have never ever been properly trained, I have spent now 27 years in banking passed all able qualifications and still do not understand all. However when one walks into a Trading Room and finds that the traders, who earn top Ł / $, do not even understand what they are trading, how do you expect that someone from the Administration understands what they are processing?
The regulators have made two mistakes cheap money and products, which even the creators of the product do not understand.
Just to the comments from Asia I lost my job due to the failing of the Asian market in 1989 Christmas, the system was blown up, nobody know what was going on (knowledge) and cheap money (National Banks); but an additional factor was the systems between the banks did not stack up, therefore the crash came not because only of "cheap" money but due to the lack of preocessing, information and last knowledge of staff.
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All these happened because of very low interest rate and as interest rate was increased later.
To stabiles the market we have to cut rates fast and pump money into the market, remember Japan in the nineties, as things are going we are heading towards 0% interest rate.
Hopefully lessons are learnt and the central banks around the world does not mess the world again by having unrealistic rates too low as it had once and too high as it is having now.
Second round impact will be number of business filing bankruptcy as they cannot afford to repay the loans or get loans.
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To be honest, as far as I can see, so much of this crisis has been engineered by ridiculous financial reporting standards which require banks to mark their assets every quarter.
All it takes is one piece of bad news, which causes one bank to mark an asset class lower, which in turn more-or-less requires others to do likewise, followed by the marking-down of other assets linked or contaminated, and so the world collapses.
If you or I buy a long-term asset, we wouldn't dump it because it wasn't now worth what we'd paid for it - we'd hold it. The only loss that matters is the one on the day we're forced to sell.
When the markets recover (as they inevitably will, given time) those left standing will be declaring unheard-of profits, whilst so many others will have lost everything, all in the name of transparency.
It isn't so much the end of the system, as - I hope - the end of short-term, stock market-led quarterly reporting, which does nothing but breed volatility and risk for all concerned.
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As I expected, Lehman's has been allowed to go to the wall (quite right too). The world has not collapsed - its just a bit more volatile and uncomfortable.
There are those who say very large financial institutions usually have the resources to get themselves out of a mess while smaller fry collapse and that large organisations affect the global arena, thus some organisations are too large to be allowed to fail. This is rubbish, based usually on self-interest (they have shares in the company concerned). In fact if a company is so large that it affects the global market seriously, then it suggests that a regulatory cap should be placed on the size of companies across the globe such that no company is believed to be immune from failure.
As an aside, all executive bonuses should be paid several years in arrears when a true reflection of their contribution to the success or otherwise can be ascertained (and reduced or eliminated for poor performance). Many CEO's and senior executives stay a few years then jump ship with their large bonuses before the s**t hits the fan at present, leaving shareholders and employees to suffer.
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I am really worried about the Bank of America / Merrill Lynch deal. It doesnt feel right at all, why would they pay so much for a company that they could buy for a snip? Something doesnt seem right here, and that really worries me.
If a strong bank buys a weak bank, the transaction makes strong bank weaker. If the weak bank is really really weak, it is possible that it can bring the big bank to its knees as well. Just how much of a black hole is there at Merrill Lynch? Where is Bank of America getting the cash from the buy this lame duck?
You would have thought potential lenders to Bank of America would have been a bit wary after they were dumb enough to buy Countrywide. Perhaps they are doing this to create the illusion that they are strong as well.
I doubt that they are, and I wouldnt be surprised at all if they were to hit the headlines in the near future as they too succumb.
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Wow what an inflated price B of A have paid for Merrills. Will it be enough to settle the nerves I wonder? You have to feel sorry, yes sorry, for Lehmans. They did not have enough luck or enough friends. Watch out for the next one - won't be long sadly.
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When this blows over, as it surely will, what is to prevent the same banking wide boys setting up similar fragile systems?
When will society in general wake up to the fact that the mystery in financial affairs is largely to do with keeping the suppliers of the money (you and I) dark about those making the money (the so called fat cats). There is litle in banking to justify the enormous salaries and bonuses paid out annually, and, as above, we all know where the money really comes from.
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All sorts of institutions and individuals will be reacting this week, and not in any coordinated way, although some will communicate with one another. So how it will play out overall is quite unpredictable; this is not a situation that any of our financial models is set up for. Seems to me that this is a moment for most of us, including financial commentators, to apply a rule I learned many years ago in wartime uproars with everyone shooting in the darkness: keep down and stay put until either the craziness subsides or you can figure out which way to go.
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Seems that 'Capitalism Isn't Working'. At least, the Anglo/American model. I would like to ask how our neighbours, the French, despite not having the vast oil revenues we have had over the last 15 years, are not heading into recession. Why we are 'begging' them to build our new power stations. Why they not enduring vast utility bill increases? Not long ago politicians used to mock the French and their 'faulty' version of capitalism. Who's laughing now? Privatisation of anything tht moves didn't work. Time to look to the French model, not the failed American one.
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The article linked below, entitled "Lehman Brothers in $8.7 billion bonus payout", is from December 2006. How fiscally irresponsible can you get, doling out obscene bonuses when the company's financial positions were as exposed as they turned out to be?
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article754348.ece
I always found the bonus amounts paid to a bunch of milk toast 30 somethings at investment banks utterly insulting to the rest of us who have proper jobs and make things or help people. I guess the chickens have come home to roost.
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welshrams, before you grab for what may be
a falling knife, I suggest that you check out what
Noriel Roubini has been saying, as in this video.
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This is what happens, when the "tail wags the dog"like it has in America for 40 years!!!
Honesty and intelligence were put aside for
"politics".
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Regarding Chapter 11, I used to work for a firm that went into Chapter 11. The staff were all made redundant, and various "advisers" and "consultants" have continued to earn fees for the last thirty years trying to sort it all out.
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leicestersq, rcrobjohn, is this $50B that BOA
paid "real money?" I don't believe it. I'll bet they
swapped some junk bonds for the deal.
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The essential truth is that America has been living on borrowed time and money, beyond its means, for decades. Now many families have two or even three jobs just to keep up with the repayments. Many have sustained the lifestyle by putting the credit card bill on the mortgage, which is well providing the house value continues to rise. But now they are tired. They can't make it any more. The rich got richer and the poor are exhausted.
The sub-prime strategy delayed the inevitable with one last crazy twist and the financiers got too clever for their own good, gambling on financial products that top management just didn't understand most of the time.
And so the house of cards got higher and higher. Sooner or later the bill was going to come in. And it has. Someone took one of the cards out from the house of cards.
By the way, this is not to say that the Brits have the moral high ground. Far from it. We have quietly been doing the same in our own little way. And as the quake spreads from America to here, I'm afraid many of our houses are going to fall down. And when houses are back down to being worth three times salary, how many will be left in positive equity, do we think?
Oh, what a tangled web we weaved.
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This is all utterly predictable and has been for the last five years or so.
The development of the Chinese (predominantly) economy, has led to massive price deflation of key (consumer) products, which in turn has kept inflation at bay. Egged on by (greedy) bankers spotting a 'once in a lifetime' golden opportunity, the central banks have kept interest rates stupidly low, because they have been able to get away with it.
We then have a bank induced speculative bubble into which most people have been sucked (good or bad credit risks). The banks have lent like fools, the bad risks have defaulted (American sub prime predominantly so far) and the system has come apart at the seams.
It doesn't take a Nobel Laureate to have predicted this. I thought this was what independent central banks were supposed to predict (model) and then plan for, before the problem could become too large.
What's galling is that most of these bankers have made billions off the back of this stupidity (and have (again) been lauded as 'Masters of the Universe'). Most of them will not personally suffer for their folly. Millions of home owners (that were daft enough to believe them) will. And everyone else is left to pick up the pieces.
Where America goes we will surely always follow. UK property development loans, buyto let, personal mortgages - take your pick for the seam that's going to come apart first in the UK.
Let's hope that this time banks can take a step back and begin to remember what their real role in the economy is (prudent allocation of capital to where it can be best utillised and is most needed to serve society).
.............and of course (so called) developing nations have to take advice from the very people that have presided over this fiasco.
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I'm sure letting Lehman go bust was the right idea and have been saying so for some days.
I note Merill Lynch has been taken over by Bank of America at a 70% premium over the share price on Friday. Is this a good deal for Bank of America, paying substantially the over the odds to acquire more dodgy assets? How are they funding this??? Doesn't this weaken Bank of America?
And how long before is it back to $2 to the Ł?
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Repsondong to leicestersq (post 53) BoA did not raise cash to acquire Merrils. The BofA said it would exchange 0.8595 shares of its common stock for each Merrill common share in a $50bn all-stock transaction. Based on Friday?s closing prices, the offer is the equivalent of $29 per share and 1.8 times Merrill?s stated tangible book value.
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#50
Spot on with the comment about the increase in businesses filing for bankruptcy as a result!
It is not just the cost of the loans they already have increasing which will cause this.
Following recent events banks will now be even more cautious about lending to each other. In order to maintain their own balance sheets and maintain a meagre level of lending (to keep the machinery oiled), they will need to call in loans to many smaller businesses, who, in the new financial landscape are reassessed as a potential risk.
This will lead to additional unemployment which will further drain the governments already threadbare purse. This in turn will lead to redundancies in the public sector.
The fallout from the current situation will be a vicious circle of decreasing credit to consumers and small business and decreasing public expenditure.
Which, considering the ridiculous increase in public service workers in recent years might not be a bad thing!
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I think we are now re-learning the lesson our Great Grand Parents could have told us... that Financial markets CANNOT regulate themselves- and that while yes regulation, and strict regulation at that, DOES limit the possible gains that can be made... it also prevents mistakes like the ones we see now. Which are similar to the ones made by our Great Grand Parents in the 1920's.
De-Regulation of the US Banking system however is not the fault of Bush or Reagan. It was a certain President Clinton who really de-regulated the US financial markets, hence why at first his term in office is seen as such a high water mark for the US economy (not forgetting the dot com bubble).
Lest we forget that the MOST conservative and de-regulatorial government in recent UK history has been the current Labour one- it is in the policies of Gordan Brown that we see Britain becoming such a great place to make money in... but also a place open to great risks.
Like our Great Grand Parents we will soon have to see how deep the recession goes. Luckily for us, we have the economies of the Middle East and Asia to support us and help us.
And maybe we will continue to believe that Bankers can regulate themselves. But that is impossible. Remember- it is the LEGAL duty for every company who has shareholders to generate as much profit as they can for the shareholders. It is illegal for them to do otherwise. Unless we set up clear and STRICT limits onto what they can and cannot do, globally, they will always cut corners, make the risky deal and every so often, pay the high price.
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This comment was removed because the moderators found it broke the House Rules.
I have just learned two things.
Firstly, my earlier offering has been modded.
Secondly, one of our largest competitors was financed by Lehman.
However, I am not going to break out the bubbly for the simple reason, as my earlier offering implied, that no matter who you are and who is financing your business, we are all now very vulnerable.
It is a great pity that there are those in the BBC who do not appreciate colourful descriptions, however appropriate. In future I will turn off Mock the Week.
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i thought the stock market was always ahead of the curve, therefore as even my grandmother knew lehman was a dead duck today's falls must be factoring in the next "shock". The fat lady has obviously not started singing yet!
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46. At 09:43am on 15 Sep 2008, Ikantbelieveit wrote:
Does anyone else think that this problem with the US sub prime mortgage market had it's roots in the stimuli applied to the financial system by the US government in the wake of 9/11.
The US Government urged people to go out and spend money to prevent a recession and reduced the interest rates to fuel the economy
I agree totally. I wrote as much on Nick Robinson's blog yesterday.
Yep. Pre 9/11 the US economy was still a bit ropey after the dot.com bust. Post 9/11, the US was desperate not to hand a further publicity coup to them pesky Islamists by allowing a US recession to take hold in an already vulnerable environment.
So the US cut interest rates and flooded their economy with borrowed money. Ha! Osama Bin Laden - you may murder our citizens but you won't bring down our economy. Riiiiiiiiight.
Over here, this was suddenly the perfect excuse for our own squanderer-in-chief to start hosing the cash around. Any time I attempted to highlight the insanit at the time (from 2003 onwards) I was knocked back by grinning apparatchiks giving it 'We're not borrowing as much as the Americans'. I don't care if the US destroy their economy. I don't live there.
And so it has come to pass. The US look to have destroyed their economy but Gordon Brown seems to have destroyed ours. They'll seek to blame it as an 'imported problem'. All America's fault. But it simply isn't true. If our government had kept to sensible (prudent?) levels of tax and spending then we wouldn't have triggered our own consumer boom off the back of one million newly employed, newly flush, well-paid public sector employees.
Nope. We'd have just sensibly pootled along, our house prices would have remained sane thanks to regular reminders from our prudent chancellor and press about what happened the last time we got carried away with the faux wealth of increasing house prices. That didn't happen because everybody with an IQ higher than plankton knew full-well what was driving our 'miracle economy' and it suited this government to keep the illusion going and the press.... well they are predominently liberal arts plankton too so if somebody with a maths GCSE tells them 'The economy is great - here print this latest communique from number 10' then off they go.
This country has been let down by the government and the media. This great confidence trick could not have lasted beyond 2003 if anybody in power or the media (particularly the BBC) had spoken up.
The banks will get what they deserve. The over-debted, over-borrowed Bev and Kev Plankton will get what they deserve, the politicians will (eventually) get what they deserve but I'm betting Evan Davies, Mr Peston and the entire BBC economics team will still be employed until they decide to retire.
Where were you guys in 2003? Indeed, when it is so obvious who has been at fault all along - where are you today? Reporting that Lehmann is bankrupt is hardly tough. Where are y'all with highlighting the underlying causes of this financial catastrophe with specific reference to this governments culpability?
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The fed needed to let at least one major institution go bust as a deterrent to bad practice in the future.
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Every time I see or hear Robert (who may be a good economist, but is the poorest broadcaster I can remember in such an important role), he goes on about 'In all my 25 years as a journalist', 'Never in my whole career' etc
We've got the point, Robert, these are unusual times...
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Of course what we are really talking about here is massive global corporate-sanctioned fraud and debt-laundering, aided and abetted by the utter impotence of the regulatory bodies. But as usual the suits in charge have had their noses deep in the trough over the years and it's the workers and home-owners that will pay the price. Governments should be able to raid the homes of these corporate fraudsters and seize back their ill-gotten bonus payments to help the plight of their victims.
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I am baffeled to hear the amounts of dollars that are thrown around here: $70 bilion dollars here, 45$ bilion there.... where is all this "money" and who owns it... very confusing all this...
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I predict that Warren Buffet will become even richer as money pours into Berkshire Hathaway. Why? Because Buffet only invests in what he understands. He keeps it simple and manageable.
One of the problems with the "investment" banks like Lehman Brothers is that they weave a web of increasingly complex financial instruments so that ultimately no one really knows what they are actually investing in. They may appear to make money for a while (and generate big bonuses for their traders), but they are ultimately flawed. The CDOs were an example of this.
The trouble is that while they appear to make money, no one wants to ask any questions. What we need is simpler banking where the banks lend directly to whoever will actually use the money so that they can properly assess the risks. So that depositors can assess risk, the regulators should force banks to disclose how much they have lent directly to "end users" and how much they have lent to which investment banks. Investors can then have an indication of how well their bank has a handle on the risk.
Some may say that derivatives and collateralized bonds came about to fulfil a market need. However, I would be more sceptical and say they came about as a way of making money appear on paper to get bonuses because I believe that these bankers are more motivated by big bonuses than altruism.
It is now time they faced the music. Rather than propping up these flawed investment banks, the governments should be encouraging sound banking via the regulators forcing banks to disclose where their lending lies so we can see how well they are managing risk.
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i don't claim to be a guru when it comes to global economics, but I would have to say that George W Bush is to blame for our current global instability. His knee jerk reactions to 9/11 and subsequent destabilisation of the middle east has only exacerbated the faulty accounting practices and poor lending policies in the US.
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#34, #35, #49 and CEO or Deutshe Bank:
I COMPLETELY agree with you. Especially #34: "Value is created fundamentally by making things- our young people should be inspired to become engineers and scientists not investment bankers-lets get a pay structure that does this."
I do Applied Physics (although I am trained as an Engineer) I have seen SO many of my classmates who went to top institutions in India and around the world to study Engineering and then moved to become INVESTMENT BANKERS! They were all very smart, articulate, and fundamentally GOOD engineers, and NONE of them had ANY qualifications to make them bankers. But the pay differences were HUGE.
Even now they are STILL ENOURMOUS! This also lead to hyper-inflated egos, a sense of "bravado" and a needless risk-taking nature that even spilled on to their private lives. The responsibility of the current crisis lies equally with these intelligent, brilliant, and over-paid individuals as the people and institutions that were supposed to control / monitor them.
The pay packets NEED to be rationalized, the bankers MUST be trained properly, perhaps a qualifying exam (like they do for CPAs for example). GOSH - even LAWYERS have to take a bar exam before they practice, and these traders have NO qualifications for their jobs, no "quality assurance" that comes with them, how is this rational? How do people trust such banks who employ such people with their money? I find is SO strange, it is almost surreal.
Do any Investment Bankers even read this? I wonder what they think. Do they think their pay packets are rational? Clearly some, eg #49 - princeSnowknight, don't.
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Yay ! How marvellous it is to watch those pigeons coming home to roost, thus proving yet again the old adage that 'what goes around, comes around'.
The most pleasing aspect of all this is knowing that the multi-squillion dollar 'share incentive plans' are now worthless.
Maybe instead of looking to the taxpayer for the next round of bailouts they could start re-possessing the yachts, Porsches and raft of investment property portfolios held by the over paid munchkins who got us into this mess.
And because this is the 'gift that keeps on giving' we can look forward to more hedge funds going bust, and toasting the fingers of those who got a bit too greedy.
This is the day the planet fights back against those who ignore environmental factors when making business investment decisions, and bang on about 'externalities' because they couldn't give a monkey's about environmental sustainability.
A tough lesson, but learn it they must...
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sizzlestick - I vote your submission should be the BBC 'post of the day' !
Wonderful stuff - I heartily recommend you to read 'Globalisation and its discontents' by Joseph Stiglitz to get the 'inside view'.
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Business reasons aside - the amount of money wasted on trivia at Lehman was shocking (obviously LB are not alone in this). On one hand they'd pay lip service to the environment; on the other, the MDs, CEOs etc still travelled everywhere by limo and took first class flights the way the everage person takes the tube. Ł5,000 expenses for a CEO for ONE night was not uncommon. In the area I worked in there were far more VPs than the structure warranted, each with their own office and the associated costs incurred. Heavily subsidized restaurant (as if anyone in Canary Wharf is underpaid and needs that)... I could go on but I won't - I just think it makes good business sense, as well as environmental, for investment banks to cut down on the ridiculous excesses that have become the norm.
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What a shame that this comment will not be read, because I am too late to reach the top of the list.
However....
Can no one see that the system is to blame. Not just that some are paid huge amounts of money to generate schemes that at first seem to be cash generators, but in reality is merely calling something by another name.. in the sub-prime debacle it was non-repayable dabt being called a CDO. And in the wholesale market it is lending to a bank money that another bank has received by way of deposits, but because of banking ratios, the banks are lending money that they do not actually have. When I went to school, in economics this was called 'flying a kite' now it is called banking.
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In response to dicktownsend (#42), it was Pierre Joseph Proudhon - one of the founding thinkers of anarchism - who wrote "property is theft" ("le propriété, c'est le vol") in his 1840 book, "What is property". Although Proudhon influenced Marx (and was later attacked by him), this idea is nothing recognisably to do with Marxism.
(The slogan prompted the following philosophical joke - Q: Why do anarchists drink herbal tea? A: Because all proper tea is theft).
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The beginning of the end is how one person put it. Well! It depends on how you see the end. It is certainly the beginning but what sort of end we are likely to see is a complete unknown.
When talking of trillions of dollars of phantom assets taken out of the financial system it will be many years before anyone can put a true value on anything.
So in the meantime property will be virtually impossible to value or sell. Cash is king.
Banks will be so desperate to build up liquidity only those with gold rated credit ratings will be able to borrow and only at a high rate.
The social implications across the whole spectrum are unthinkable. We're back to reality.
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So that's it then, another one bites the dust. Won't be the last but might prove to be the biggest. The bankers won't like it but they need tougher regulation to help them get a little twitchy before they act fast and loose with other peoples' money in the future.
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If you can't put down a third of the price, be it on a car, house, furniture, operation, whatever, you can't afford it. If the western economies do recognise this fact and make it law this cycle will continue again and again as bankers, like everybody else, will always look at profit today and let tommorrow be damned. This is big news now but people will forget quickly and chase the filfy lucre in the same way in the future. Incidently, love the comment about voodoo economics. I hope Dr. Mahathir feels suitably smug.
It's very anal to make a posting about a spelling error. Please get over it all you who have commented.
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I am a little surprised at the continual description in the news media of Lehmans as a150 year old bank. In fact the original Lehman Bros was in trouble in 1984 and was then taken into American Express. Part of their operation re-emerged in 1991 as an independent under CEO Richard Fuld and grew rapidly (perhaps too rapidly) by clever(?) financial resource management. They almost came a cropper in the late 90's Russian financial collapse but continued to prosper afterwards.
So really this is a story of boom and bust over a relatively short period of dodgy dealing not the long term demise of an iconic financial institution with long term credentials.
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For all those Americans suffering from the meltdown, this is the right time to read a fellow American - Henry David Thoreau! He does have some sound ideas! and his books are not expensive!
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The Bank of England today pumped an extra Ł5bn into money markets in the wake of the crisis at US investment bank Lehman Brothers.
The funds were almost five times oversubscribed by banks, which put in bids totalling Ł24.1bn - a sign of the fresh pressure on the financial system following the news.
********
Robert- please tell us who these banks are that are looking for liquidity. You must believe it to be in the public interest to tell us as you told us about NR.
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Dear Robert
There is more to come AIG, is on the down, and the last 18 months of market share the trend has been continuosly DOWN, according to the graph.
So what is going on, this appears to be driven?
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Nobody's yet mentioned that Lehman has around USD 150 billion of debt outstanding, the senior of which (the highest level) is trading at 30 cents in the dollar and the subs (next down) at 5 cents in the dollar... take a guess as to what the rest is worth.
For comparison the next biggest corporate default ever was Worldcom at 30 billion. Even Russia and Argentina, when they defaulted, had half the debt outstanding of Lehman...
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What is next, who's going to be next victim next to Leman Brothers
What is going to be the next European Leman Brother
This is seriously bad news for all of us
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Dicktownsend (post 42): French anarchist Pierre-Joseph Proudhon said 'property is theft' in his 1840 book 'What is Property? Or, an Inquiry into the Principle of Right and of Government'.
John Locke said, in 1860 "...where there is no Property there is no Justice..." often summarised as 'property is liberty'. Proudhon also said it, and he said 'property is impossible', too.
Not confusion - it depends on what kind of society you're looking at.
The current crisis in the world's financial system is the result of unfettered greed, remuneration that rewards short-term gain at the expense of long-term value, the failure of prudent controls from senior management that long-since ceased to understand the instruments their traders were operating. It has been based not on lower-return but true added-value activities - manufacturing and agriculture - but the elevation of sectors that should serve them (accountancy, law, banking and stock trading) to industries in their own right, making money itself the most easily-tradable commodity. Money is a measurement of value, it isn't value of itself, and depends on belief to sustain it. The gullibility of people in the markets who truly wanted to believe there was a way to huge risk-free gains - or, at least, that there would always be someone else on whom to offload the risk - put the icing on the cake. When belief stumbles - tripped up by the tearing away of the curtain to reveal the lack of substance behind it - collapse of confidence is inevitable. The banks that have 'failed' were never worth anything of themselves to begin with; it was only the value of that which they had invested in that was worth anything. As they had invested so heavily in other banks and financial instruments, there is no bedrock to cushion their fall.
I said that.
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Driving a car doesnt kill its occupants. Its being stopped suddenly that does. In the same way theres nothing wrong with credit. It creates wealth, which when spent filters down to the next person. But when you stop it suddenly thats the killer. We need to bring back credit and stop knocking it or we will all feel the effects.
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"The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence."
Tsunamis, earthquakes, and meteors impacting earth are accidents. The financial meltdown which is reminding everyone with a memory of 1929 is not an accident but the result of deliberate human acts over a period of years. It is the direct result of klepto-capitalism American style. A very few people have made billions of dollars and will walk away with the money. Millions of others will be exposed to the free-fall of the "free market".
Meanwhile socialism for the rich and "you're on your own" free-market capitalism for the millions gets another round in the USA and other "western democratic kleptocracies"
Whatever it is it is not an accident.
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Re POST 31.
The bankers got us into this mess, but you'd rather listen to another banker telling us it's not all bad?
The world truly has gone mad.
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Where were the highly paid Risk Analysts, Senior Management and Risk Directors in all this? At Lehmans, NR, etc? Surely they're sole job is to identify and indemnify the institutions from any unacceptable risk and develop recovery strategies in case of financial meltdown?
Or is the problem that the CEOs definition of "acceptable risk" changed and they stoopped listening to their Risk assessors?
Greedy, incompetent, arrogant... Or all three?
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I'm no expert but I do know this is bad news. What happens in the US has an unnerving impact on what happens in the UK. 3 USD to the GBP? I don't think so ... we're on a downward spiral with you!
Didn't the US have a fiscal surplus under Clinton??
Maybe us Brits should have listened to those Euro-crackpots after all. Not long til we adopt the dollar ... (joke) (-ish)
Housing markets have been plain bonkers for at least a decade now. A product is only worth what someone will pay for it, sure, but many people simply don't understand what they can afford. What would happen if interest rates were to hit 10%? (Heaven help us!) There needs to be some way of levelling off house prices but goodness knows how. Businesses can do it. Too late now methinks.
And can we stop criticising people for spelling please? Just because your spelling isn't great or you make typos occasionally (who doesn't?), doesn't mean you can't have an opinion.
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#90
It was my understanding it was ALL major high st banks! Lyoyds TSB approached the BOE the week before NR, for example, according to various sources.
There was no element of reprimanding the "upstart" northerners until NR though, so RP kept it quiet!
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The most silent of them all - John Reid
Just wait, just wait...
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Alright, I admit it, I'm a novice in my comprehension of the financial ways of the world. But reading the early post that said "The US subprime problem is a problem created by lenders. And then exacerbated by securitising the loan books"...
I just had to stop and wonder. "Securitising?" Did George Bush write that post???
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Tut,Tut, Tut, MrBBrown. Robert was correct. See your own dictionary re 'to tide one over' = to assist one in recovery.
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Fantastic insight and coverage over the weekend and, well, the last 12 months Robert. Thankyou. Ordinary Joe's like myself wouldn't have a clue without your detailed but readable analyses. Very few other business journalists, and even fewer bankers and politicians have seemed as switched on to the depth and extent of the unfolding financial disaster.
What gives with AIG?
#5 Get a sense of proportion, have you never made a spellchecker refractory typo when you've been up all night reporting on events of massive global significance?
...Thought not.
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Point out if im totally wrong as im a new comer to actual investing, but as i invest into an ISA wrapper, and have a regular savings fund so i invest Ł200 each month into 4 separate funds. if these funds were to crash to stupid prices then surely im getting better value. Therefore in the long term when the market does sort itself out, these shares im buying now will be worth X2 or even X4 the price they are now.
Its no point selling shares at these low prices because everyones a loser. So why not buy buy buy to get the price back up again.
As for the US, you have to blame the government, they have been ill-advised and should have got more people renting rather than buying.
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"their being too much..." etc. You mean "there being too much..."
Standards of written english at the BBC seem to be slipping
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The Lehman/subprime problem has 4 levels: a. banks making loans with decisions to lend make by computers (badly programmed) or perhaps monkeys. 2. FreddieMan and FannyMay taking the low grade mortgage loans into their portfolio, thus allowing banks to make more subprime mortgage loans 3. Lehman, and other investment banks packaging bad mortgage loans and selling off to market as a securitised financial instrument and 4. when the bubble burst, the interbank lending market dried up and created a liquidity squeeze.
Not the first bubble to burst, remember the Tulip Bust or the Web Bust or the secondary bank crisis in the UK in the 70's?
No tears for Lehman shareholders or management. Goldman Sachs saw what was coming and got out months ago. Lehman, as it turns out, piled in to a looser. The bank was not very well managed. Dumb is as dumb does !
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94
Interesting about Locke writing about property in 1860 ... as he died in 1704.
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I do think that there is a myth surrounding, banking here, and in the USA, that when you deposit your money in their vaults it is kept safe for you, blatantly this is a lie, it is used in lending, stock market investing, currency speculation, and 90% of their customers never realise that this happens.
When times are good, and Banks announce record profits, nobody lobbies for a windfall tax, and Banks never pass on these returns to their customers, as they have to keep the shareholder happy first.
Regulation clearly states in Financial Services that individuals need to know of the risk they take when investing, and take the consequences there after, this now needs to happen when your wages hit the Banks accounts, so that we all know of the risks they take.
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The significance of the events (or at least the attention grabbing "meltdown" headline) are clear from the 100 comments the story has received in 5 hours!
#104 Couldn't agree less. RP reports "the facts" with more spin than a ferris wheel!
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Comment 72 : U9461192
.
"Where were you guys in 2003? Indeed, when it is so obvious who has been at fault all along - where are you today? Reporting that Lehmann is bankrupt is hardly tough. Where are y'all with highlighting the underlying causes of this financial catastrophe with specific reference to this governments culpability?"
The culture in which we live doesn't allow criticism of anything that has been accepted into the mainstream psyche. No widely-supported concept can possibly be bad, or wrong even if it fails irrevocably, because it's just not acceptable to doubt the process through which mainstream thought is derived. When there is irrevocable failure, it's not the mainstream concepts that are at fault, but the actions of a few rogue individuals in implementing them.
So the choice for individuals with personal ambition is either to work uncritically within the constraints of what is, in reality, a deeply-flawed value system, or, more boldly, to go through the charade of trying to promote alternative policy as being even better than the existing policy, which, by definition, is faultless in every way.
It's no wonder that so few are actually prepared to put their heads above the parapets.
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108 - ooops! i meant 1660.
Thank goodness I didn't pick up a PEston about 'tied' or anyone else about 'their' rather than 'there' (or vice versa).
Ruari
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"10 of the biggest US banks are pooling thier cash..."
- I take it that all these 10 banks are the banks that actually OWN the US federal reserve? For anyone confused by that - do some research and find out about the federal reserve. It isn't "federal" at all - it is a private bank.
Of course the fed will bail them out. They use federal reserve money ( created from nothing) to cushion the blows and the taxpayers will pay these amounts back ( in real cash).
Anyone know who actually owns the Bank of England???
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It's nice to see the banks working together although they are no doubt only trying to protection their own position. I would agree that the whole thing has been fuelled by both parties - the lenders and the borrowers. However, it is disastrous that no one has taken note of history as sub prime mortgages have been around since the 70s if not earlier. That fact that the industry has been caught out and consequently involving more Tom Dick and Harrys is all down to greed.
As for the asian markets, closed for the day does not necessarily mean they won't be unaffected. They are still getting quakes in Sichuan 4 months after the disaster - No one can guarantee that the markets will not suffer when they open and it certainly won't help to digest the mooncakes.
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It was my understanding that Northern Rock entered into a deal with Lehmans to sell sub prime UK mortgages at inflated rates in early 2007. Following the collapse of NR, Lehmans pulled out of the deal.
If that's the case, fairs fair!
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Whilst the numers are extarordinary, recent actrivity puts pay to the notion that paying top dollar for staff gets the best results.
Banks will need to eat an awful oot of humble pie before the public trust them in the future!
What is hard to understand is why the US is being so honest with its liabilities whilst the UK, Europe so much less so.
Does it not show that regulators here are missing more than just a few screws.
A further scare that we don't need but must be asked, after AIG how many other Insurance companies are also up the creek without a paddle and how many are in the UK.
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karim1981, you're correct to a certain extent. If you're investing in a unit trust which has some kudos owing to its past performance and fund manager, then obviously keep drip feeding, as the trust will probably have something like 30-50 companies in the fund (surely they can't all go bust). However, if it's individual companies then surely more research will need to be done in the companies liquidity and past financial performance. I mean, if a company has been making losses for the past 8 years and you decide to pour you whole life's savings into it you've either i) researched well into the company ii) know some inside infomation or if neither then you're just speculating which could result in seriously burning your fingers.
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I have more of a general question from a simpleton as far as international finance/banking etc goes.
If a mortgage lender folds in the same way as Lehman Brothers what happens to Joe bloggs who has a mortgage with them?
Does he lose any cash paid in yet still have to make repayments or does he have to sell up and pay back the outstanding balance of his mortgage or is it something entirely different?
Answers on a post card, closing date 15 Sep... late entries will be considered.
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The FTSE is down nearly 290 (5.35%) at 12.22. How much is this real buying and selling or is it just traders marking down stocks, hoping to induce an element of panic selling at low prices on which they can take a profit later in the day?
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The financial meltdown has been caused by chronic underegulation of the financial system and the poor mangement of financial institutions by people of little obvious talent.
I think we should start the clean up by banning the trading of all derivative instruments - buying the right to trade things you don't own, with borrowed money, is just plain bonkers.
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To continue your analogy with the Morecome
and Wise Show.
It must have been Ernie "what wrote the Banking Regulations"
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these "bankers" are a sad joke. arrogant, greedy, and dishonest. i speak from experience as i was a banker for 15 years before i couldn't take it any more and got out. i never saw a bigger bunch of ego driven second rate "professionals" in my life. just imagine if engineers were made of the same stuff. bridges and buildings would fall down. about time they paid for their mistakes. bear stearns, lehman, reduced to nothing, who's next i wonder...surely someone should go to jail for all this? there's gonna be a lot of big houses and second hand ferraris for sale soon...
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Epitomised by their Washington Consensus, the neo-liberals have long been shouting themselves hoarse about the so-called super efficiencies of "free" markets to take care of themselves through their much-touted "self-correcting" abilities and, concomitantly, their abhorrence of any kind of governmental "interferences".
Resultantly, "brilliant" CEOs and "top" managements have long been shamelessly and obscenely overpaying themselves in this free-for-all environment. But now that losses stare them in their faces as a direct result of their own cowboyish and arrogant ways, they run like a bunch of scared and spoilt kids seeking to hide under the skirts of their "motherly" government. Of course that "mother" was only a big nuisance when those so-called "profits" were being looted by them.
The banking crisis in US today is evidence of a well-pepetrated fraud of the neo-liberal economic agenda on a gullible and a largely unorganised public.
Now that the so-called "efficiency-generating" philosophy of the neo-liberals has been exposed and lies in tatters, time has come for a rethinking on this much-hyped agenda of the neo-cons.
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I'm going down the pub with a couple of die-hard socialist mates to have a long overdue laugh at the plight of this banking vipers nest that have finally recieved their just desserts are years of unscrupulous dealing.
Anyone fancy a pint?
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At the beginning of the weekend, Bank of America were being touted as the front runner in buying Lehman. It now transpires that they were targeting Merrill. This must mean that Barclays, who were being billed as 'also ran', were actually the only game in town when it came to rescuing Lehman.
We now know that Barclays withdrew because the Feb were not willing to underwrite the short term fall out when Wall Street opened today.
Three questions come to mind:
1. Did either Barclays or the Fed know this was BOA's agenda before and during the negotiations?
2. Was Barclays denied the protection they sought because they are a European bank rather than home grown.
3. Does Lehman's bankruptcy protection mean that Barclays can go back in and cherry pick the parts of the business they actually wanted in the first place?
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benblack #113
The Bank of England was privated owned until it was nationalised in 1946 by the Labour Govt. It remains a nationalised bank but Gordon Brown freed it from direct govt control when Labour came to power in 1997. This was generally welcomed but it appears that this decision has contributed to the credit crunch here in the UK. The reason is that responsibility for managing the banking system, interest rates and regulation is now much more blurred. Responsibility was divided between the Govt, the Bank of England and the Regulator and they all blamed each other for not preventing the Northern Rock debacle. The system is crying out for someone to be in charge and we need that body to have the authority to act and to be accountable for their actions.
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HBOS share price down almost a third. Here we go, speculators on the next institution to hit trouble!
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The danger here is that panic overtakes reason. Although the real estate finance model has broken down, for the moment, banking has brought many efficiencies to markets, which should not be thrown out like a baby with the bath water. How many people benefit from modern portfolio theory and ETFs in their savings? A degree of sane analysis is what's required, a little reading of If by Rudyard Kipling. And a little less sensationalist reporting...
If you can keep your head when all about you
Are losing theirs and blaming it on you...
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My advice would be to seriously look at any cash deposits anywhere, particularly the UK which has not seen in any of the writedowns on the scale of the US market. Mortgage assets have not nearly been marked to market in the UK which is still in denial about a property meltdown. I expect a 70% correction in UK values before this unwinds. Bank's portfolios will be shot to ribbons and my call is for RBS to be the first to fall.
Barclays and HSBC appear safe "for now" at least. The ABN/Amro deal for RBS would very badly timed and that's just another reason why I feel they are teetering.
Would be interested to hear what anybody else thinks of this.
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Threnodio
I live in the US and I feel that your analysis is about right. Last thing that the FED/Treasury could be seen to do would be to effectively give free money to Johhny Foreigner (Barclays). Had it been BOA/JPMorgan that would have been a different story IMHO.
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Further to my post 119 in which I asked in relation to the fall in the FTSE of 290 points, "How much is this real buying and selling or is it just traders marking down stocks, hoping to induce an element of panic selling at low prices on which they can take a profit later in the day?"
I note the market is now staging a rally. In 30 minutes the FTSE has recovered from a fall of nearly 290 points to 253.6 points. Someone is still making money....
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Robert,
Unlike the Northern Rock fiasco, they can't blame this on you.
Can you please write an article for the non financial readers like myself, subject simply;-
Where did all the money come from and where has all the money gone, or was it just all a paper exercise ?
Thank you
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Swanjoe (124)
I'd love you join for a touch of schadenfreude and a few pints you but I'm busy writing about events as they unfold (and moving house...)!
Ruari
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Kakkoo
I agree 100% with you but the problem is this. The fat cats who will lose their jobs as well have already disappeared with their ill gotten gains. These are salted away in the Cayman Islands never to return. Miss secretary and Mr. Clerk are the innocents who will pay for the young guns greed and folly. The "smart asses" will return later in another disguise and work the system again. Meanwhile they will sip their martinis whilst waiting for the dust to settle.
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Why does it matter? Yes a few big investment banks will disappear in the next few months but it can be argued that is a necessary market correction in the present climate besides these organisations have milked financial deals creating huge profits for themselves at the expense of the rest of us for years and now it is their turn to suffer pain! As for the investment bankers on their massive bonuses well tough luck!
Having seen our UK manufacturing base being systematically destroyed over the last 30 years I have absolutely no sympathy for these people who collectively through their short-term investment views created much of the demise in UK manufacturing even in specialist areas where we had unique competitive advantages!!
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This comment was removed because the moderators found it broke the House Rules.
As a minor matter of style please stop using phrases like "as I said would happen". Makes you sound triumphalist in your predictions. We KNOW you have to keep your ear closer to the ground than the rest of us... It's your job. :-)
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"the most positive development in the past 24 hours is that 10 of the biggest US banks are pooling their cash in a collaborative"
Is this a lifeboat?
Is it better to be outside, doing the backstoke away from the wreck!
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Re 118 - the mortgage counts as an asset to the institution which issued it. They can then sell it to someone else, either directly or part of a package (MBS, CDO, etc.). If they still own it when they go bust, it's still counted as an asset and can be liquidated to anyone who wants to buy it (in buying it, you buy the right to receive regular payments from the mortgagee until the loan is amortised fully). So nothing changes for the person with the mortgage - they still pay, they just pay someone else.
Re 119 - the FTSE trades as a "fair value" assessment of the 100 underlying stocks. If traders intentionally marked these stocks cheaper to induce panic, they'd be just as likely to be hit by opportunistic buyers seeing that the marked-down stocks represented better value. The buyers and sellers, through their actions, combine to create the market price. While it's possible to manipulate the market in small illiquid stocks, it's not possible with the FTSE. 200 points off the FTSE represents the true concern that investment banks can and will go bust.
Re 120 - derivatives facilitate a wide range of activities aside from speculative trading - they allow oil refiners to regulate the input-output of the refinery, international companies to stabilise their cashflows from foreign operations, UK sterling funds to invest in non-sterling investments... Or do you mean you'd rather ban speculative trading?
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20 years of excessive, easy credit fueled by the 'bubble king', the 'new economy cheerleader-in-chief' - aka Alan Greenspan has lead us into this mess.
It was his direct entervention in the markets when a natural correction was due (aka the Greenspan Put) which is the primary cause of the problems we are experiencing right now.
I fully expect a handfull of Investment banks and financial instututions to go belly up before we see the end of this crisis, which by my reckoning still has 4-5 years to run.
Traders who have been in the market for the last 20 years (during the irrational exuberance of the Greenspan Fed) still have their heads in the sand and seem to believe that the Fed will come to the rescue once again and bail all their irresponsible activity out.
Wake up, smell the coffee. Even if it wanted to, it could not. It has become part of the largest centrally planned communist (I know this is contentious but look at the central planning stats of the old Soviet Union and China for proof) state with Comrade Paulson effectively running the show.
Now is the time to offload your toxic waste on the Fed (while it will take it) and buy things which will maintain their value. (US Treasuries are not one of those things.)
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I worked for a company that went through Chapter 11 Bankruptcy proceedings a number of years ago. The creditors ended up owning the company and the shares were worthless leaving the shareholders to take the brunt of the failure. If they've gone from $50 to $3.50, then you had better sell now because they'll be worthless in very little time. See Northern Rock for details. I wonder if the Fed will end up owning the majority of Lehman?
One can only hope that the folks who received the big bonuses (essentially out of our pension funds) were paid in Lehman stock.
Still, the FTSE is starting to look good for investing some cash.
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#132
I totally agree... "They" can't blame this one on Robert. Won't stop "us" blaming him for Northern Rock though!
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FTSE 100 5,183.90 -232.83 // FTSE 250 8,666.00 -310.71 // FTSE All-Share 2,643.88 -113.15
Time to invest in the smaller firms and stop thinking the bigger ones are "more secure"!
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as I learned from US statistics, the subprime market is app. 3,5 trillion (3.500.000.000.000) usd. according to my modest opinion, this amount can be written off completely. now due to the normal multiplier, that we know from economics, app. three times as much money will be withdrawn from circulation. due to all these new funny (for whom ?) new CDO's (collaterized debt obligations) this amount could be much more. we will eventually see, but amounts now used to save the system seem small. fortunately the hedges funds going (covered or naked ?) short on lehman could earn a fortune. seems all very far away from once trusted and dull bankers, who at least had the moral obligations to take well care of other people's savings.
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Re POst #30......" i have long believed that a large part of this problem has been the media feeding frenzy "The only news worth reporting is bad news"- ......
"But, for the avoidance of doubt, this firm is not bust nor seems in imminent danger of collapse".
Oh dear Mr Peston - perhaps your degree in hindsight is not a first class one after all!"
You can't have it both ways...either the problem is the reporting causing things to happen....or it isn't...How come Peston's report collapsed the Northern Rock but failed to hold up Lehman???
And just a note from the real economy...I am heading out right now with some fellow executives here to start loooking at possible new offices....already this morning one agent quoted the rate per sq ft/ price to buy and immediately went on to say .."but it's all negotiatble"...
From the posting name you'll guess I play a little chess....but I have never met an opponent whose first move in a game ----was 'Resigns'!!
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139 - Your reply regarding morgages to 118 isn't strictly true. Anyone/institution who buys them from the liquidation can foreclose on them under the terms of the mortgage if they want to. It's entirely up to whoever buys them up and more importatntly why they've bought them up - especially in a market where house values are falling and because of this likely to fall further and faster. Hardly a good longterm bet are they, especially with a recession in the background as well.
Got short term realisation of assets written all over it.
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Where are all the free marketeers? Perhaps Lehmans can go down with out the sky falling on our heads. Not to diminish the human tragedy but it has come time to find out that our 'precious' banks can fail and life still goes on.
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Reversion to the mean; simple economics; yin and yang, even: the simple fact of absolutely everything is that we can't survive without balance. If we lean too strongly in one direction, we fall over.
Lehman's leant (lent?) too heavily, as did others, and unbalanced the market for their own profit. But why were they even allowed to?
The economist Alan Smith theorised that so long as companies are limited by healthy competition, their profit seeking inavertently drives them to act in the most socially optimal manner. But, as business people will collude rather than be honest, this theory can only be true when these business people are properly governed.
What happened here??? Despite this 200-year old theory, businesses people colluded, too much money was being made from unsound investments in a less than transparent, ultimately irresponsible market. Where was the governance?
I hope the Lehmans case is a catalyst for the governments to properly regulate these companies from now on, even if proper regulation means impeding short/medium profits.
The economy, as with everything else in life, will only grow at its optimum in the long-run when it is at its most balanced, and businesses will fall over when it isn't.
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Red Lenin - to confirm - presumably as long as the person keeps making his repayments, the new owner of the mortgage can't foreclose on him? Nothing changes unless the person breaks the terms of his mortgage, at which point the new owner may take a more or less aggressive line in foreclosing...
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The Fed did not step in to save Lehmans. IMO the reason for this is because there are too many organisations in similar financial situations for them to save them all.
What is happening in America will also happen here and Mervyn King has his head in the sand and is hopelessly out of his depth.
What is needed in this country is a pro-active response by the Bank of England the success of which can only be measured by movements in bringing LIBOR back to its historical relationship with BOE base rate.
The blame game is a waste of energy, liquidity is the life blood of the economy. If you find someone bleeding on the ground the first thing you do to help them is too stop the bleeding and so far the BOE has failed to do this.
The BOE is in the unique position of always having access to liquidity and it cannot keep up its current non interventionist policy and when they do react it is likely to cost more in the long run.
A stitch in time saves nine.
Oh and Robert it's tide them over not tied them over. You would think you would know this from your twenty five years in journalism, my guess is that you were over excited when typing this article.
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"Value is created fundamentally by making things- our young people should be inspired to become engineers and scientists not investment bankers-lets get a pay structure that does this."
I agree wholeheartedly with the sentiment of this, but the practical application in a globalised society is much much more difficult.
We cannot compete in cost terms with China or India, so unless we want to be paid nothing and have a huge class of workers manufacturing things for pennies (I don't know where you might find people like this in the indigenous population) and we give up being a consumerist economy, we will not make money or add value to our economy by making things.
I think that the banks will let things settle for a while longer, wait for some headline grabbing control structures to be put in place before it all starts the whole cycle again. Once we see growth returning in anything from 12 - 36 months time, then after a little delay, the controls will be removed again and the cycle will repeat.
The greed that is inerrant in banking and investment makes that a certainty.
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All this shouldn't come as much surprise, for those who bothered to look at the economic basics - i.e. you can't make money form nothing, which is what selling on debt effectively is.
Investment banks cannot be trusted to regulated themselves and need a sharp shock, sadly this will affect many others along the way; for others greed and hubris.
Not sure this has been mentioned yet, but what about existing risk regulation? Wasn't this supposed to protect the markets, financial institutions and us? It just goes to show Sarbannes Oxley is utterly useless as it avoids instruments/transactions that are not understood, which is precisely where you should be focusing your risk efforts.
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#136 - J.J. Carter
No - but expect a lot of fires blamed on terrorists which later turn out to be 'insurance jobs'.
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#147
I think the "human tragedy" is the very real one facing the economy. The market is going to be flooded with people made redundant from these institutions that will very quickly find their particular "skills" are no longer required in the new landscape.
Not to mention those who were promoted well beyong their abilities who will discover you can't just walk into another senior manager job from a collapsed company in a crumbling economy.
Much has been made of those at the very top, with their bonuses, etc, but those lower down (the middle managers) will not be able to find altenative employment in a comparable company. These people took bonuses in shares (albiet on a smaller scale than the top dogs), so have seen their savings obliterated.
The admin staff can move jobs with relative ease and their bonuses will have been predominantly cash.
I'm not defending those who benifitted from the "Peter Principle" of promotion, but it means the Daily Mail readership will take a hit.
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#149 - ChiefWhiteHalfoat
Except, of course, why would anybody foreclose on an asset which cannot realise the value of the borrowing? As an exercise in damage limitation, you are better off negotiating a reduced return than ending up with something you can't sell.
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#155 threnodio
Do you mean the mortgage or the property as the asset?
If its the mortgage, then I think the key is to not sell it on. That's how this trouble started. The companies which buy the mortgage books of these failing banks need to be in it for long term, fixed returns, rather than "a quick buck" which they'd achieve by waiting a little while and grouping these mortgages back up into securitisable bundles.
Selling debt, with the hope it's "good debt" to other institutions who find out its "bad debt" is clearly unsustainable.
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149,155 - check the small print. A mortgage company can foreclose on a mortgage irrespective of whether you are up to date with your payments or not. You'll find it in the dreaded T and C somewhere. Usually they have to serve a notice of intent with a period as per the contract - usually 56, 90 or 180 days - but they can call in the loan whenever they want. Might seem unfair, but it is their money and you didn't have to borrow it.
155 - these mortgages that Lehmans subsidiaries holds will be sold on at a fraction of their value so there is evry possibility that they will be snapped up by short-termists
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Well, if the terms are not broken, the value of the mortgage is the present value of the future cash flows discounted by the risk of future default. If the terms are broken, you have to judge if there's more value in claiming the underlying asset (house) or negotiating a new series of future cash flows. But I was really questioning whether a mortgage owner could foreclose regardless of whether the mortgagee was obeying the terms of the mortgage... I would think not, otherwise if I wanted to buy a house I could buy a delinquent mortgage for peanuts and then kick out the occupant!
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Just a small point from someone who is not part of the 'great financial sector'.
The banks only have themselves to blame, they allowed people to lend money who had no means of repaying, they have been unbelievably greedy over the last few years pushing credit down everyones throats and pushing up house prices to a rediculous level.
The point now is it is not only the financial institutions who are suffering. What about the small businesses who have followed all the rules and run their businesses competently, finding themselves now victims of the credit crunch.
Is there a get out for us? Can we go cap in hand to the government asking to be bailed out? I think not !!!!!
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It's concerning to know that the collapse (of Lehman) may have far reaching implications and may affect ordinary people, but frankly that aside, I couldn't care less that they're in trouble; they deserve it. After all, this whole credit crunch thing has been brought about by the greed of relatively few individuals.
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Oddly, no one seems to point out the one obvious thing about banking (and sizzlestick in Malaysia should realize it will happen there too.)
Too often these banks get into trouble, because modern banking is all about quick profit - and big profits too. Most of these bankers are sharks - paid handsomely when snapping up money making 'deals', but quickly derided when they make losses. The fact is, a secure banking system cannot rely - as much as it does today - on hedging over the drop in the price of oil, or buying up trillions of mortgage debt - resold so many times no one knows whose debt it is. They invent schemes to squeeze money out of everything - and the rest of us are supplying that money - it is not coming off a tree. They've been left to regulate themselves - it's time to get much tougher and downsize some of these operations.
Long term goals are far safer - and I am glad the US Treasury did not bail Lehmans out. It might make other institutions think a bit harder about their actions. I expect the Lehmans board were just expecting the gov. to jump in and bail them.
The reality is I don't want my tax dollars subsidizing guys (and gals) who have made zillions making life far more expensive for me - while they keep their Porsches and Manhattan condos. Some of those players should finally be brought to account for what they do... Nothing like a good shock brings reality back - and the world financial system needs one. If tax dollars are needed to bail out the banking billionaires, then obviously they should be forced to change their 'loser takes handouts' attitudes.
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I'm a simple businessman, we invent things and then we sell them,nothing to complicated there. We want to borrow money from a bank,they ask us for boatloads of security and then they lend it to us at a couple of points over base. we deposit money with them, we pay out cheques and we pay them in and they charge for all those services. That is what banking is about. If they want to go off and play at being speculators with other peoples money thats up to them but make sure they separate that gambling business from the baking business because they are not the same. Government legislation can easily forceit to happen. so here are the rules. if you are in the gambling business you either use your own money,you can not borrow from anyone else to fund your gambling and you can use other peoples money only when they know you are going to gamble it and they can not have borrowed it either. Let bankers bank and gamblers gamble and ner the twain should meet.
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The big question is whether this represents the crisis of capitalism to match the crisis (and demise) of socialism 20 years ago. It is not only business and financial confidence that is lacking. Public confidence in the grotesque political soap opera churned out at Westminster is at an all-time low. Events could make the 'Big Bang' in the City seem like a muted physics experiment in Switzerland.
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I've said this before but it bears repeating hear... I'm in the Reinsurance world and part of what undid a lot of Lloyd's reputation was the excess of loss spiral of the late eighties and early nineties in which reinsurance companies were parcelling up risk and passing it on, only to write it again later further down the chain. one could say the quality of risk was for the sake of the quantity.
Ever since then Insurance and Reinsurance companies have been criticised for being so far behind the banks in the way they conducted themselves and their regulatory requirements. And as a result so much professionalism in actually doing the job has been squeezed out in favour of mmeting objectives, targets etc.
So where are we now....heading down a path in the opposite direction to bankers running screaming in the opposite direction.
Unfortunately the problem was identified as lack of regulation as opposed to lack of professionalism and experience. So the concentration has gone on employing people to enfore regulation and employing graduates despite the lack of common sense that so many of them are afflicted with. They come in and learn the business from a management level upwards and not from the bottom like the old days.
The upshot is new business are stifled. It's too expensive and cost wieldy for them to set up anymore. Which renders the bigger companies immune to the kind of pressures which once kept them on their toes.
It's apparent through all walks of life now. We are no longer the nation of shopkeepers upon which our economic wealth was based. Entrepreneurism (if that's how it's spelt! ) is dead.
The shackles have to be released. It's what was behind the success that Thatcher enjoyed. We have to set peope free to set up and run the small company again. Only it's a lot harder now that we have sold our soul to Europe.
i hope it's not too late.
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Interestingly, page 8 of this article passes on a rumour that a group of hedge-fund managers planned the collapse of Bear, Stearns, and then started planning the same for Lehman. Spooooky.
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I posted that this was going to happen and quoted Max keiser of karmabanque, Resonancefm, Al Jazeera, France 24 and Streetiq.
maybe you should contact then now
Danny Schechter:
http://www.youtube.com/watch?v=7qCu_cMECZw
Have a nice day.
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Bank of America and Merill Lynch obviously want to go down together.
Have they been watching the film ''Titanic'' ??
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#164 - Timmytour
I'm not sure I agree with you about graduates, after all Adam Applegarth was a graduate and - Oh - Point taken!
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The blind following of market forces has led to this dire state of affairs.
The time is ripe to adopt a new system to manage the worlds resources and end the dominance of the worlds wealth by a handful of wealthy families along with their gambling casinos that have every greedy person mesmerized.
This insanity has led to the death of countless millions throughout the world and the impoverishment of billions more. The time for the crime of separation to be brought an end and the recognition that we are ALL entitled to our fair share of the earth's bounty is now. We need people of vision and courage to initiate
a global system of sharing that would bring an end the stifling of our greatest asset, human creativity.
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10 banks in a Lifeboat. Sounds a bit like the Raft of the Medusa. Who will eat who; we can only wonder.
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'The chief motive of capitalism is greed, and the war amongst the greedy is called competition.' Karl Marx.
Personally, I believe that all those things that make for a civilised life, water, energy, transport, etc, should be owned in common and managed for the benefit of everyone.
But, then, I am very old fashioned.
Curious, isn't it, that the French nationalised, and therefore according to Thatcherite received wisdom, inherently totally inefficient, company, EDF, are the only ones that are in a position to prevent the total collapse of our electricity supply system by 2015.
To admit, in a country with 400 years known reserves of coal, and a pioneer of nuclear energy, that we are now incapable of constructing our own solutions, as a government minister recently did, is a sad indictment of policies of dereliction and betrayal.
The fact also, that we daren't raise more than the faintest chirp of protest over anything that the Russians might choose to do, so firmly have they got us by the cojones over gas supply, is an adjunct to those policies.
The 'sub-prime' crisis, has been caused totally by greed. I find it curious, but not surprising, that people will insist on re-inventing the South Sea Bubble over and over again, and rush to inflate it, until 'Pop'.
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#157 - Red Lenin
#158 - ChiefWhiteHalfoat
By the asset, I mean the bricks and mortar. My comment related specifically to the UK property market. I should have made that clear.
I have not practiced for some years and may be out of date but I recall that if a lender did foreclose, there was a legal requirement that the lender should seek to achieve the market price for the security. Thus, if there was any equity left once the debt was satisfied, that would accrue to the debtor. I recall situations in which overstretched borrowers who were unable to meet their payments or sell at a decent price deliberately resorted to delinquency leaving the lender with an unsellable asset while having a modest deposit for something less demanding.
In other jurisdictions, this does not apply and there are a number of European countries where the limit of the lender's obligations is to sell at a price which satisfies the debt. In these cases, you can indeed pick up property at quite substantial discounts. However, I do not know of any jurisdiction where you can buy up a mortgage and throw the householder out simply because you want vacant possession.
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Financial collapse = great news for music lovers. The best music always gets written during tough times.
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While I empathise with young families who are caught out in the backwash of credit drying up, individuals who are literally on the breadline and so forth, I have zero sympathy for investment bankers who have lost their jobs, and I mean the bankers at the mid-upper tier levels i.e. the decision makers.
I recall articles from 2004/2005 about bond traders chalking up Ł45,000 restaurant tabs in London in a show of who can top that, and of course the yearly commentary on stellar bonuses borne out of creating virtual financial products.
For me, this is a shakeout way, way overdue.
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172. Is there an estate agent on here that can clear this up? I am certain that a lender can foreclose provided it's within the terms of the contract.
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Investment bankers now know that they will not be bailed out by the taxpayers via their Central Bank. That's a big step in the right direction. I doubt if the Fed or BoE would take the same line if grief befell a deposit taking bank like HBoS or Citibank: there would be riots. Investment bankers packaged and then laid off the risk attached to Ninjas etc. The tragedy is that the likes of Goldman Sachs, a prime mover, sold out soon after their former boss, Hank Paulson, became US Treasurer - an unfortunate conjunction to say the least?
BoA's agreed bid for ML was likewise inspired. The rug might have been pulled from under ML, but not BoA I think. Still, the barrel of apples will have been poisoned there is more to come, to judge from the comments of Alan Greenspan.
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The acid test of Pestons prediction will come when Wall Street closes tonight.
As I write at 16 12 its down 212 whivch is nothing in this volatile market.
The fed meets tomoorow so American can expect a drop in interst rates.
Now given all this am I able at 63 a retired nobody able to predict better than Peston who is on begabucks, only the newxt few days if the market flies later this week then we should questions Pestons ability as the BBC no1
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singing susan....an apt reference ;if you recall there were survivors on the raft and there will be survivors after the dust has settled whenever that will be !
doubt that citibank will survive though they've filed a claim with the receivers of $138 billion...
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Just picked this up from Bloomberg -
Nouriel Roubini, an economics professor at New York University, said the independent securities firm model is ``fundamentally flawed'' and that every securities firm will need to combine with a bank to gain a deposit base and greater access to loans from the Federal Reserve.
Seems like common sense! Well, if they can find banks with an appetite for that exposure to debt.
This next period is going to be Darminian theory applied to financial institutions. Only the strongest (few) will survive.
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#175 - Red Lenin
A surveyor and ex-estate agent. Here I can be definitive. The property belongs to the beneficial owner, i.e. the person to whom it was sold. Normally this will be the householder. The mortgage company's control is by way of a charge registered in the deeds. In order to sell from 'under the owner's feet', the mortgage holder must execute the charge by obtaining a court order for possession. A mortgage is therefore an asset which can be bought and sold or otherwise transferred but it is merely a charge. So no, you cannot simply throw someone out on a whim. You either have to have an agreement with the owner to hand the property over or you have to go to court.
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Everyone might have been speculating about a big bank going down, but no-one seriously expected governments to let it happen, even if it is an investment rather than a high street bank. Even the UK administrator admitted in the press conference that he was surprised. Alan Greenspans is right that the fallout will be much wider and last for much longer. 2009? More like 2012 before the daylight is there again.
Preston predicted Northern Rock and now Lehmans, but what about AIG. No news on that? If this insurer doesn't get it's $40 billion rescue loan granted by the US government, then it's website claim to be one of the largest and most stable insurance and financial services organisations in the world, with 69 million customers worldwide, and ranked as the 18th largest company in the world will seem pretty meaningless. Who will have any confidence left in the system then?
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This comment was removed because the moderators found it broke the House Rules.
First of all thanks to R Peston and everyone else whose comments have helped enlighten me as to the surreal machinations of various financial institutions.
However, as someone who studied evolutionary biology I am puzzled by Peston's assertion that "There's a time for cut throat competition between banks, and this probably isn't it."
I would be more inclined to agree with poster 179 re Darwinian theory. Surely the stakes of any competition between banks have rarely ever been higher, with potentially massive rewards accruing to anybody left standing.
The collective fund established by the big 10 banks looks like one of the highest stakes games of prisoners dilemma ever, and one would have thought the hyper-competitive nature of most of the CEOs with the responsibility for making the important call would assure some degree of mutual destruction.
However, I suspect my lack of understanding how all the banks are interlinked will probably render this interpretation far too simplistic.
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A huge investment bank has been allowed to fail as an example to other banks.
At the same time billions are being printed to keep other banks and the markets afloat.
These are reactions to crises as they evolve but as they are becoming more widespread no one seems to know from where the next ones will appear.
If hedge funds are responsible for a lot of these problems then they should be outlawed and the sooner the better so markets can return to normal activity.
Only then will the true scale of the fall out be known
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Is this whole situation not because of the way banks take a Ł1 from a saver and then lend Ł10 out?
When all credit standards disappear, and a bubble of illusionary asset/tulip values grows to epic proportions with 10 times savers money, and then inevitably collapses, they are holding onto the none of the savers Ł1's but -Ł5 of losses.
It seems to me that the 'bankers' and this system when led to excess are responsible for all the major crisis of the past century.
Why have we not moved to a 100% reserve system, where each Ł1 of savers money matches each Ł1 of debt created? The only downsides for savers are that the only risk free savings would be government debt. Any mismanaged banks which fail will be allowed to fail and banks would be like any other industry in the economy and not have a hand in every persons paypacket when they fail!!
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Almost a silly thing to say, I guess, but it's amply clear during the entire credit crisis that the global financial system is neither run for the benefit of the public nor accountable to it. Even so, we're gonna have to pay. And pay.
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re MBBboy (Post 30) I too have tended to "blame the messenger" Paston for the Northern rock shambles. At the time he failed to understand (or at least was unable to explain) the difference between liquidity and solvency. Result: panicked depositors as well as rueful shareholders.
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I've never been financially astute and am always being told I'm 'risk averse' with my investments. I think events of this year have justified my posture.
I find in this 'market driven' economy as soon as any large organisation gets into trouble they go grovelling for help (and quite often get it - Northern Crock, Funny Mae et al). If I'd done the same I really do not think my bank would be so accommodating.
What is going on?
From the country that has more management consultants and accountancy firms, per square inch, than anywhere else on the planet how come its all gone belly up?
One word - GREED - backed up by completely inadequate controls (e.g. the inept FSA in the UK and the SEC in the USA).
I mean who exactly was 'minding the shop' when all these housing loans were being made and being 'played with' like casino chips. Was nobody watching and seeing the potential for disaster? I think any man in the street would have more sense than this lot appear to have.
Why don't they all own up to being like 'pigs at the trough' and stop pretending they didn't see it coming.
So much for Havard Business school and its ilk. They certainly don't seem to have taught much common sense to any of their alumni.
Maybe we should have a bonfire of all the books by these wondrous management and financial gurus. These 'experts' can NEVER be taken seriously EVER again.
Good Night and Good Luck
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Robert,
What I find most galling about this situation is that, having heard a number of interviewees on various BBC Radio programmes, including "Today" and "PM", nobody from within the banking industry actually seems to believe they've done anything wrong!!
On "Today" one said that they thought the regulators were to blame, because they made foolish trading too difficult - surely just because the lid of the sweetie tin isn't nailed down, it doesn't mean the children (in the city) have to nick the sweets!!
Then tonight, on PM, another said he couldn't see the reason for tighter regulation of the derivatives market - for pete's sake that, according to your pundit friends is the root cause of the whole debacle!!
These people are surely not real! Whilst they are looking for anyone else but themselves to blame, your readers (around the globe) face diminishing pension funds, job losses - not to mention (heaven forbid) their houses falling in value!
The whole thing makes communism seem quite an appealing system.
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In response to another comment, Bank of America (BOA) did not have the Merrill Lynch takeover as its objective, except maybe far in the future. What happened was that BOA, like Barclays, was in the picture to maybe take over Lehman when Merrill Lynch panicked and decided it needed to be swallowed right now by somebody stronger. Paulson first approached Goldman Sachs, which refused on the grounds that they didn't know enough about Merrill Lynch to value it. So then Paulson turned to BOA and in effect said "You know more about Merrill Lynch than anybody, and you won't touch Lehman without guarantees I won't give, so you get to swallow Merrill Lynch right now, whether you want to or not." Note that today Merrill Lynch stock is up and BOA stock is down.
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It is a very sad reflection, that at least in part, the near toppling of the financial system can be tracked back to 9/11. The combination of interest rates being too low for too long and an unregulated financial system appears to have had unforseen consequences. The US economy and international credibility have been left in tatters by the dual spectres of Iraq and what has now come to pass. This is what I fear historians will record of the Bush era.
It also strikes me though that there are some simpler explanations. The fact that US mortgages are 'no recourse' is also an issue. Let's not forget that the condo speculation in the Sunbelt was fuelled by speculative purchase of property that wasn't a primary residence. If you haven't put much money down, and the worst that can happen is a black mark on your credit history which gets dealt with in time, then why not gamble? If the bank could pursue you then you might think twice. Isn't this a sensible piece of legislation that we have in the UK would make buyers think again in the US??
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So it seems at the end of the day the best assessment is that the Anglo American system is that it is probably based on "voodoo economics" because we have no knowledge of what happens next either professionally or politically and on that basis the reckless gambling with the unrestricted use of public funds by all concerned continues apace. Can I submit a fee note please?
Does the word "accountable" mean anything any more or am I just old fashioned?
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Re 183 - this case of evolutionary biology doesn't involve independent competing species, it involves a curious web of mutual symbionts... It's all very well someone like Goldman trying to push Wachovia over the edge, but the harm it would do to the sector and to Goldman directly would be more damaging than the gain of taking out a competitor...
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This is serious stuff, thousands of people are tonight pouring over their finances to see if they will be able to carry on paying the big mortgages. For those bankers that took us into this mess I have no sympathy, they can cry into their champagne till the cows come home.
I feel sorry for the workers, the back office staff who through no fault of their own will be chasing the same jobs in the morning.
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I am a math teacher, so economics is not my specialty. However, I know enough about Chicago School tatics and Friedman Economics to know that our government (U.S.) implimented the same things that have been done to other economies around the world, by U.S. "consultants".
Our government/financial leaders of the past 7 years are complete hypocrites. They preach de-regulation, no government involvement, and let the market take care of itself. And what's the first thing all of the corporations that have gone under, have in common? They all went running to the government (and were given) bail-outs !
And what is the average, hard-working, tax-paying, (foreign policy dis-agreeing) individual supposed to do? I am paying a mortgage that is now $60,000 more than the value of my home. How do my wife and I save money to send our son to college? The banks and corporations get bailouts, and the average American gets screwed! We're not asking for a handout, just a level playing field. I have zero sympathy for these lenders and leaders.
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Some people may wonder why France is less affected by all this.
Firstly, the French are not as "property mad" as the Brits and the US and others (Spain etc). They're happy to rent, and most do.
Secondly, VAT is applied to all property sales at high rates, cutting down the whole concept of property speculation.
It's harder for the French banks to get involved in property crashes, unless of course they are mixed up in our mess or in the US.
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Like many people, I'm wondering how many more unpleasant shocks are coming our way, and when we may look forward to more favourable conditions.
I'm struck by some or the ways in which people respond. One is that many are made uncomfortable by the sheer uncertainty of it all, and desparately look for "certainties" to cling to. Early on in the events of the past year, many people were seeking to reassure us that it was all just a mild correction, and that conditions would soon return to "normal" (i.e.the way they had been immediately before the credit crunch). So there seems to be a natural "It'll all be over by Christmas" (as was said at the outbreak of World War I) response. More hopefully, others have said that it needs a sort of ritual sacrifice to mark the bottom of the cycle in the form of a major bankruptcy, and that price has to be paid before conditions can start to improve. So have we seen this? Maybe it's when everyone can only foresee unrelieved gloom that the worst may have happened, and things start slowly to improve. After all, the human animal is remarkably inventive in a crisis, and maybe forecasters haven't factored all of that in.
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I think I'll redeem my paper money at the bank tomorrow. After all it's written plainly on it, 'I promise to pay the bearer the sum of whatever' and gold sovereigns are still legal currency. A sovereign would cover the weekly shop at the supermarket nicely - no, I'm bragging - fortnightly shop - ok three weeks... anyway I should think the supermarkets would be glad to receive only gold and it would put us back on the gold standard - our only sure salvation - lickety split. Ok there'd be a few teething problems but I'll be getting down to bank pronto ...
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Where was the oversight?
The real problem was letting the market get away with this in the first place. I can only hope some much needed regulation happens because of it. Also, all these financial institutions are in bed with each other and the ratings institutions particularly let EVERYONE down. Some of the deals these people were peddling like famous Goldman Sachs sub-prime bundled second mortgage loans based on a total average equity of just 1% should not have even gotten a junk-bond status! Instead some of the tiers received a AAA rating! Completely insane if you look at the fundamentals of what they were selling. Get the ratings people out of bed with the banks, get the brokers into their own houses, get the banks back to being just banks and not offering all these services under one roof!
I think the biggest stink SHOULD BE the deal Bank of America made to acquire Merril Lynch. They should NEVER EVER be allowed to own a brokerage firm at all. It's a built in conflict of interest and I predict it'll bite them (or us) in the ass eventually.
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The whole crisis is so simple.
It is a pyramid scheme.
The initatiors, the bank owners and their executives promise everyone to make a fortune. Some people indeed will make a fortune, I mentioned already the most important profiteers.
But the problem is mathematics.
For every person to make a profit many people have to pay. The first people make money but the rest loses. And in the end there are not enough people to make a profit so the structure collapses. That we see happening.
In Albania the pyramid leaders were almost lynched, in the USA - the country which the most prisoners of all countries - these scoundrels, these swindlers, are still regarded as successful business man, and they walk around free with the money earned on the backs of poor people who never could not buy a house but were dragged into a scheme to buy a house anyway. These people and there protectors at the top of the American society (using people's money, taxpayers money to finance this pyramid scheme) just continue telling fairy-tales.
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Meltdown, is fast approaching. No amount of
Govt or private central bank intervention is going to stop the debt "black hole" vortex sucking everything into it. The big question is, with an estimated 90+ banks in the US being on the endangered species list, (and lord knows how many other global financial institutions), will the Fed allow their banks
to go under, or will the "person" in the street continue to subsidise failure and corruption through rapidly devaluing currency, and developing hyperinflation. The interconnected world banking sytem will now bring each day news of the collapse of this or that in the UK and elsewhere. If theres any light at the end of the tunel in terms of US house prices rising, its going to be like the cavelry arriving after Custer was slaughtered at the battle of the Little Big Horn. Far too late! Each person
should be asking who is responsible for this unfolding human tragedy and demanding that they be brought before the courts!
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Ha!
30 years of neo-Conservativism. From Thatcher and Reagan through Blair to Bush, Brown and Cameron.
FAILED.
Next ideology please...
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Everyone blames the bankers, but they are only partly culpable. What about the people who borrowed high salary multiples, well above their means, knowing they would struggle to afford repayments, just so they could skip the 1st rung of the property ladder that all our parents had to go through. It takes two to tango - a lender AND a borrower!!
And what about all those people who put money into funds and other instruments because they were greedy beyond the yield that their savings account could provide.
It was collective greed from both the bankers AND the ordinary man on the street that got us into this mess. The politicians could have stopped it, but did not have the will to tell the public that they couldn't have it so good any more.
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IMHO, the low interest is not completely the root of the mess; although it might partially is. One of the main culprits is the "smart greed" of the lenders and all speculators who spot a chance to make profit from available money to lure those who think they also can make profit from "other's money". Eventually, it is taxpayer who share the burden, and the economy suffers. Another culprit is the regulators who fail to do their jobs to check or intervene and just play along with the "tradition": wait and see, and either a scapegoat is found or a victim appears to justify their attitude and actions.
It seems odd that those big banks frequently boast of their "super-intelligent leaders" and their complex financial models which probably a PhD is still not enough to understand. Now, are they intelligent? How are their models? It sounds too silly boast now.
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After Welshrams gave Robert Peston quite a lot of grief and also stating what was important was how much Wall Street ended down, I wonder what he thinks now it actually ended down 500 points, its biggest point drop since 9/11?
Welshrams also singled out Bradford and Bingley as showing Peston was wrong, they are down 15% thus showing he was right, or at least more right than welshrams....
Which goes to show you can always make money out of optimists who get carried away.
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I'm not clear on two points:
1. Based on the slant of the coverage are we supposed to be sympathetic towards the Lehman employees who lost their jobs?
2. Why aren't the police ringing the Lehman Bros. building arresting those leaving? With the exception of the janitorial staff of course.
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Averywiseman - you should never borrow if you can't pay it back either... it takes two to tango. It's far too easy to blame the banks - the fact is that everyone in the developed world has benefited from easy credit over the last few decades - now it's gone too far and unwinding, everyone wants to point fingers at each other and the 'big greedy banks'.
Ironically, this last weekend will help your 'brave lending' in the long term - one of the things that will help banks believe in lending to each other is if one or two do go to the wall. A spring clean if you like. Not that this helps any of the thousands left jobless following the last few days - good luck to all of you, hope you're back in work sooner rather than later.
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I agree with Joostnederland; it is a pyramid - although now upside down in its most vulnerable; soon the mass above will collapse onto the ground below crusshing all who stand under it. I am afraid we are only seeing the start of the global financial meltdown; in reality nothing has any value anylonger...even gold or oil!
What perhaps we could do is to start digging our own coal from beneath us ...400 years of proved reserves takes some beating much longer than oil...put the power back into British Industry; bring in the jobs and keep the home fire burning. We can also get those 10 new nuclear powers stations up and running and to hell with global warming..it does not exist anyway except in the minds of those earning a living from the scam...sorry next scam!
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"So much for Havard Business school and its ilk. They certainly don't seem to have taught much common sense to any of their alumni. "
Their job isn't to teach common sense but to teach people how to make money quick. In that aspect, their job was done well.
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Why don't we call a spade a spade and hold the US to account for allowing its financial sector operatives to perpetrate the grand larceny that is the credit crunch? Had other countries come up with a similar scam and persuaded US pension funds to part with hundreds of billions of dollars for duff goods, you can be sure that President Bush would be pressing the case for "regime change". Just look at what is happening to poor Venezuela and Bolivia when US economic interests are threatened - and on a much lesser scale.
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Bankers ,does pavlov ring a bell for them
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At the end of an "interesting" day I'm reminded of the antique salesmen stranded on a desert island with all their antiques.
For a time they all made a fortune trading and selling on to each at progressively high prices - until they discovered they had eaten all the coconuts and none of them knew anything about farming or making a boat.
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"But, for the avoidance of doubt, this firm (Lehman) is not bust nor seems in imminent danger of collapse."
Robert Peston, on this blog, 10th September.
"As ever, the BBC's Robert Peston gives us some of the most incisive comment."
Website: Citywire
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It started with property bubble burst and is likely to end with fall of the current currency system. The journey has just begun!
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I think the Fed has put a peg in the ground here to tell the big players 'we just don't have the funds to keep bailing you out' and so the true game begins. Tied, tide or whatever, financial institutions cannot expect to make massive gains in the good times but then be bailed out when things go bad.
As for the government here, rather than interview any ministers, the BBC should simply play a recording each time we hit a new low stating again 'these are globally turbulent times' and ' we are well placed to weather the storm' as did Alastair Darling AGAIN this morning... wonder if he tells his wife and kids the same if they ask for an increase in the household budget??
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Sorry, Robert, another error - "their" being too little cash? tish tish!
Don't the BBC employ sub editors anymore?
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Ka-BOOM!
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Post 172 refers to property repossession I presume.
The practicality of the situation is that the requirement of acheiving a market value for the property is meaningless.
Immediately the property is seized any sale is out of the defaulting borrowers hands. An estate agent if instructed by the lender, or his acting agent, says sell.
Forced sales are never near a market value, particularly went the only issue is recovering above the mortgage and default level, if possible.
Often the property sale is rapidly passed to auction. Reserves are set as low as possible. The lender then looks to the insurance policy to recover any shortfall and the insurer then pursues the defaulting borrower. Bankruptcy can result.
Fees and costs, and there can be many throughout this are wide open to unbridled ramping and are added to the bill. For the individual even to get to see the final bill is difficult.
Obviously if negative equity is present then there is no hope of a clearance of the figure. But even if very substantial equity is present it can easily disappear. Much of the action in the sale by banks of repossessed properties in early nineties was illegal (and it has been clearly documented as such, and admitted as such by ministers about 3 years later). No serious attempt was made to gain a market value, but nobody acted, as usual, including the government, and the dispossessed were certainly not in a position to.
It still amazes me how much people seem to believe that the system is ethical, or fair, whatever that means.
A bank can easilytake court action in weeks via the fast track route but if you as an individual try to take court action against a bank the chance of you getting into the judges chambers to seek fast tracking are none, and your case is likely to take 5 years maybe more.
It is worth noting that in some circumstances court paperwork can be deposited in anticipation of an event and then simply rubber stamped subsequently. It would not surprise me if it was possible in some cases that they could be mass deposited, that is certainly the case with council tax and the court bailiff can call in anticipation with paperwork believe it or not. I did read somewhere that courts were supposed to give the individual every chance etc etc but I am afraid I wouldnt expect much.
Additionally if the default has been caused by a 3rd party failing to forward due money to the individual, that individual cannot take action against that party due to 3rd party liability limitation law. All been cooked by the big boys for couple of hundred years or so at least.
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....WHAT!? so this guy is cheerleading the banking industry forming a trust. I'm from the US btw and we have ANti-Trust law to prevent this ANti-Capitalism BS.
Why hasn't anyone posted a comment concerning this?
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DEVALUATION OF CURRENCY IS THE NEXT STAGE OF THE CREDIT CRUNCH.
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It is not irresponsible to head this blog "Meltdown Monday" (with not even a ? at the end) before the markets even opened? In the event, of course, there was only about a 4% fall on Monday: hardly the "meltdown" , despite the self-fulfilling risk to the markets of enthusiatic over-reporting by Robert and the rest of the media, who seem intent on reporting a financial disaster before it happens.
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Meltdown Monday Huh!! What goes around comes around!.
A few years ago i got stung by banks,they were willing to lend and loan me money again and again and did not even check my proof of income.I was trapped, it became unbearable and i had to sell my house.Fortunately i had enough equity to pay most of my debts.Since then i have had to work very hard to get back on my feet.I am almost there now,but i have suffered,mentally and physically.These people ,bankers are parasites and they have got they deserve...finally!.
I am still working hard and still have those awful memories but i will soldier on until i am free from these parasites.
I predicted this meltdown and house price plunge sixteen months ago.It is now real!!.
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The current financial crisis is simply the burst opened precipitation brought about by the 'financial wizardy' unleshed by the higly qualified and richly paid management and financial experts, specially in US and generally in all the globally connected liberal economies.
In modern economics,the simple practice of sound financial economics-no gain without pain- is split in to unwanted and unhealthy-some times mindbogglingly complex- concepts and practices. Prestigious Business and Management institutions churn out a large number of personnel and they are let loose to do the damage in a legal and institutionalised way!
Live within means is the age old saying. The banking and financial institutional activities provide the dynamic interplay or interface through which a nations' economic strenght plays itself out to meet demand and supply requirement. The variation in demand/supply naturally creates a minor phase difference between the two-earning/spending- and it must be ensured that it is always within limits. Unfortunately, a liberalised economy provides full scope for the highly qualified financial experts to push this gap to a ridiculous magnitude. The tragedy and complexity of modern economics is that it provides ample scope to practice sophisticated business and financial models, but, the accompanied auditing that is supposed to ensure financial health will be circumvented by ingenious practices of the financial wizards!. They have invented many tools for this to hide or postpone the mismanagement from timely detection!. The most ingenious of them all is that they have specifiacally invented multi-layer institutions to handle a simple and straighforward job!. The ice in the cake is the scope for one trying to outsmart the other by indulging in mergers,takeover and acquisitions. This will render the financial audit almost impossible on account of the dynamic and chaotic environment financially created. It is like a mob indulging in rioting!. It works wonderfully well as long as input is greater than the out put or demand outstrips supply!. When it is the other way, the wizards comes out with full force to hide the failure!. Minor mismanagements get adjusted in the form of Stock market crash as general remedy, writing off the failures as non-performing assets by financial institutions as a specific remedy!. The fall of major banks and financial institutions is the only way out for the bigger mess to come out in the open!.
In the sup prime lending business model, the accountability can seen as a waste in the form of built houses unsold or surrendered by defaulters. It is a form of subsidy or bonanza dished out by the financial wizards to Americans. Now, americans need to work hard till all the assets are consumed for proper price to rectify the mess!.
Due to interlinking of economies, collateral damage has already taken place world wide as it is evident in the form of stock market crash, credit crunch and high inflation. As these countries are no angels, there is no other alternative but to lick the woonds caused.
It is time for all responsible countries to simply curb the unhealthy financial practices like multi layer financial working,rampaging credit card business that tempt people to spend more than what they earn(an unhealthy system where as the defaulters increase,the companies begin to fleece the the ones who can pay to make good the losses till they go bust!). Introduction of insurence for even the silliest possible requirement has generated a plethora of crooks who siphon off a vast quantity of easy money forcing the companies to increase the premium. When policy holders dwindle due to high premium,the related companies go bankrupt!. Insurence is a bigger malady that bleed the countries economically as it escalates the cost of services on one side(ex, phenomenol rise in health care cost), encourages dishonesty on the other side. Now, it is like no body need to care as long as someone pays!.
If remedial steps are not taken, the public and those who are in the end of the chain will absorb all the loss and pain, thereafter,the financial wizards will be back to do their good work as usual!.
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The federal reserve will buy the worth less assets including shares for worth more dollars and afterwards produce even more worth less dollars thus making the worthless assets into worth more assets .
Any uneducated fool can see that
And then, just as the coastal sea level recedes as it does before a tsunami ,a torrent of worth less money from those ,who no longer believe it is worth more, will liquidate the economy and drive gold fo infinity and beyond .
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