What a week in the world of high finance! I don’t think there’s been this much mayhem in the markets since one overcast Wednesday in 1992 when Norman Lamont pondered the ERM crisis over his morning coffee and said “Bingo! I’ll put interest rates up to 15%.”
And now look what’s happened. A decade of bull-market-fuelled leverage, debt and greed has finally come home to roost. Finally the Fed turned off the music in this bizarre game of financial musical chairs, leaving Lehman without a seat and serving as a timely reminder that sooner or later all the players in this sorry game must face the music.
What puzzles me though, in the midst of all these buy-outs and bail-outs is this: will throwing more money at the situation make it any better? Surely it will only delay the inevitable, since the initial problem was caused by a multiplication of debt and the funding of this debt through borrowing and relying on the never-ending rise in the markets. Well okay, it was also caused by lending pot loads of money to people who hadn’t a hope in hell of paying it back, but anyway consider this simple example:
Mr & Mrs Bloggs went to HBOS or Lloyds or – whoops! They’re one and the same now aren’t they? Anyway…Mr & Mrs Bloggs went to Barclays for their 100k mortgage. Barclays packaged the mortgage debt up into some whizzy financial instrument and sold it to Bear Stearns, who did the same and sold it to Citigroup, who sold it to Merrill Lynch, who sold it to Lehmans. Or whatever. The point is the original 100k debt has now multiplied to 500k.
A few months later, Mr & Mrs Bloggs start to struggle with their mortgage repayments. In truth they should have never been lent the 5x salary mortgage but there you go. So the Bloggs stop paying, along with thousands of others. The banks who lent to them run up big losses and their credit rating is downgraded forcing them to borrow more money and shock horror – pay back some of the money which they are now distinctly less likely to be able to pay.
But guess what? Nobody wants to lend any money to the stricken banks in the current climate. Then along come the speculators, circling like hawks over a bunch of rotting carcasses. After a frenzied attack on the share price, the banks – whose entire business model was based on borrowing money to finance their own lending –haven’t actually got enough cash in the kitty to cover all this lending and borrowing and are given a stark choice of a quick-fire sale or a quick death. Not much of a choice is it?
Then the Fed or the Bank of England or whoever steps up and injects billions and billions of pounds into the money markets to try and soothe the turmoil – but hang on a minute? Surely this is just a much bigger scale of the lending and borrowing that got us into this mess in the first place? In which case where does the merry-go-round stop? Who is going to pay it all back – and how, and when? And hang on a minute, what happened to the Bloggs’ debt and all the other debts attached to their debt in the gigantic ball of tangled financial wool spanning the globe?
The only answer in the short term appears to be that the banks are just buying each other out, size of organisation (and balance sheet) the only answer to having enough cash to make ends meet. Suddenly all rules about competition have gone out of the window and it’s perfectly acceptable to have a super-bank which controls the money of over half of the population.
Somehow I think that by the time this hideous mess has been unravelled, the recent series of bail outs and mergers will start to look less like a life raft and more like a millstone around the neck. There will be less choice and higher prices for consumers. There will be job cuts resulting from the mergers and higher taxes to fund the various government bail-outs. And that’s just the upside if your country hasn’t actually gone bankrupt in the process of lending out all these billions in the first place. Somewhere along the line, a debt has to be re-payed.
And now look what’s happened. A decade of bull-market-fuelled leverage, debt and greed has finally come home to roost. Finally the Fed turned off the music in this bizarre game of financial musical chairs, leaving Lehman without a seat and serving as a timely reminder that sooner or later all the players in this sorry game must face the music.
What puzzles me though, in the midst of all these buy-outs and bail-outs is this: will throwing more money at the situation make it any better? Surely it will only delay the inevitable, since the initial problem was caused by a multiplication of debt and the funding of this debt through borrowing and relying on the never-ending rise in the markets. Well okay, it was also caused by lending pot loads of money to people who hadn’t a hope in hell of paying it back, but anyway consider this simple example:
Mr & Mrs Bloggs went to HBOS or Lloyds or – whoops! They’re one and the same now aren’t they? Anyway…Mr & Mrs Bloggs went to Barclays for their 100k mortgage. Barclays packaged the mortgage debt up into some whizzy financial instrument and sold it to Bear Stearns, who did the same and sold it to Citigroup, who sold it to Merrill Lynch, who sold it to Lehmans. Or whatever. The point is the original 100k debt has now multiplied to 500k.
A few months later, Mr & Mrs Bloggs start to struggle with their mortgage repayments. In truth they should have never been lent the 5x salary mortgage but there you go. So the Bloggs stop paying, along with thousands of others. The banks who lent to them run up big losses and their credit rating is downgraded forcing them to borrow more money and shock horror – pay back some of the money which they are now distinctly less likely to be able to pay.
But guess what? Nobody wants to lend any money to the stricken banks in the current climate. Then along come the speculators, circling like hawks over a bunch of rotting carcasses. After a frenzied attack on the share price, the banks – whose entire business model was based on borrowing money to finance their own lending –haven’t actually got enough cash in the kitty to cover all this lending and borrowing and are given a stark choice of a quick-fire sale or a quick death. Not much of a choice is it?
Then the Fed or the Bank of England or whoever steps up and injects billions and billions of pounds into the money markets to try and soothe the turmoil – but hang on a minute? Surely this is just a much bigger scale of the lending and borrowing that got us into this mess in the first place? In which case where does the merry-go-round stop? Who is going to pay it all back – and how, and when? And hang on a minute, what happened to the Bloggs’ debt and all the other debts attached to their debt in the gigantic ball of tangled financial wool spanning the globe?
The only answer in the short term appears to be that the banks are just buying each other out, size of organisation (and balance sheet) the only answer to having enough cash to make ends meet. Suddenly all rules about competition have gone out of the window and it’s perfectly acceptable to have a super-bank which controls the money of over half of the population.
Somehow I think that by the time this hideous mess has been unravelled, the recent series of bail outs and mergers will start to look less like a life raft and more like a millstone around the neck. There will be less choice and higher prices for consumers. There will be job cuts resulting from the mergers and higher taxes to fund the various government bail-outs. And that’s just the upside if your country hasn’t actually gone bankrupt in the process of lending out all these billions in the first place. Somewhere along the line, a debt has to be re-payed.
1 comment:
keeping your money save in the bank is no longer true. maybe it's back to stuffing those notes in pillow cases or floorboards. but hey, sorry no floor board in Singapore :-)
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