You are currently browsing the monthly archive for September 2008.

LHC has been reported as damaged by the BBC earlier today. A magnet failure in the £3.6bn ($6.6bn) “atom smasher” was discovered to be a problem worse than initially anticipated. It will now be out of action for 2 months whilst it is being repaired.

It’s of course a huge and disappointing setback for the project. The original schedule anticipated that later this year some tangible experiment results would be available as work gets into its full swing. This will now be all postponed.

Unfortunately there has already been one more minor fault with LHC which was fixed earlier this week, whilst we were mostly preoccupied with the global financial meltdown.

More details from the BBC article here.

Advertisements

Yesterday two major investment banks suffered a steep fall in their share prices following a continuing slump in investor confidence. To survive, banks need to raise a large amount of cash, something that is extremely challenging at present due to the credit crunch – no-one is prepared to lend money to troubled institutions.

The problem with Goldmans took most by surprise as its trading results have been strong. However rumours about Morgan Stanley’s large bad loan portfolio have been circulating for a while.

The two banks are the only remaining institutions that focus entirely in the investement banking business, with currently no involvement in commercial (retail) banking.

Separation of investment and commercial banking: In the 1930s, the Glass-Seagall act was passed in the USA which separated commercial banks (which take deposits and make loans), from investment banks (which trade securities). The investment banks were allowed to do business with less oversight, while commercial banks were tightly regulated. This law was repealed in 1999, and as the result commercial and investment banks started merging their operations.

Cause of the Credit crunch: It’s a simplified story, but here goes: Increased competition between banks in the last 10 years put pressure on profit margins and forced investment banks to start getting very creative with complex and risky financial instrument strategies. Credit derivatives were born and exploded exponentially as the major growth area in financial markets. At some stage recently they started getting packaged up into complicated bundles of credit instruments, the risk on which was incorrectly assessed by the market. When bad debts on the US mortgage market started mounting up due to customer defaults in the last couple of years, banks started seeing the complex credit instruments sitting on their books turning worthless and becoming bad debts on a major scale. As banks were all exposed and started suffering from the same problem, they all grew reluctant to lend spare cash to each other, preferring to hold onto it in case of further trouble. This effect rippled right through the system and resulted in retail banks being reluctant to lend money to customers like you and I. The Credit Crunch was born.

Morgan Stanley strategy: Both Morgan Stanley and Goldmans, and other investment banks were heavily exposed in their credit investment portfolios. As the result of yesterday’s share price falls of 24%, Morgan Stanley is now seeking a merger to secure its survival. It is now in talks with Wachovia bank and also with Chinese sovereign wealth fund – China Investment Corp (CIC). CIC already owns 9.9% Morgan Stanley. Reportedly, Morgan Stanley has $120bn of “toxic” mortgage assets on its balance sheet. A merger with a retail bank will diversify Morgan Stanley’s pure investment banking focus.

Goldmans Sachs is denying that it is looking for a merger. The FT has some good commentary about Goldman’s opportunity to consolidate its strength in the investment banking sector, if it somehow manages to raise capital and weather the storm without resorting to a merger: see link

In an inspired move, the FSA just announced that short-selling of shares will be disallowed in the UK until at least Jan 09. This tops off a dramatic and scary day on the UK financial markets. The ban only applies to trading some 29 banking shares – the list can be found here. To my own knowledge, this is an unprecedented move which has never taken place before (please comment if you disagree)

Short selling: Short selling of shares is a practice whereby a bank or a financial institution borrows shares from another market player, then sells them, before actually buying them back shortly afterwards and returning the loaned shares back to the original owner. This practice is a legitimate trading operation and is executed when a financial institution expects the price to fall – hence realising a profit when buying shares back at a lower price than the price at which they were initially sold ealier. The problem with this practice is that it can be, and is, taken advantage of in highly speculative trading strategies which under particular conditions can seriously destabilise financial markets when the price starts falling uncontrollably.

Very dangerous stuff: It seems that this practice has been increasingly widespread with various market players in the past few years, notably hedge funds, in chasing quick profits. Dangerously, it can be accompanied by spreading of false rumours about a company’s stability, which can cause its share price to crash. After this has taken place, the financial institution responsible for the false rumour can make a large profit when buying shares back.

It’s probably not illegal to do this, unlike insider trading, but it is certainly totally and utterly unethical.

This has happened before: This often destructive strategy of uncontrolled short-selling has caused serious trouble on UK financial markets in the past. The net effect is that shares can be in freefall and nothing can stop their decline as panic sets in and everyone starts selling, further depressing the price. September 2008 is probably the worst example of this type of calamity. HBOS shares in particular have fallen prey to short selling on a massive scale over the past few days. But this has happened before during financial crashes over the past 10 years.

Let’s hope the FSA can reverse today’s meltdown in the UK financial markets.

All set to go: Lloyds has confirmed that it is intending to take over HBOS for £12.2bn. As expected yesterday, the share price of HBOS taken as the base of the merger valuation was the pre-fall value of 232p, as opposed 100p at which HBOS was trading just before the announcement of the merger yesterday.

The deal will probably be completed very quickly to end uncertainty around HBOS generally and help consumer confidence in the UK.

Lloyds is expected to generate cost savings of £1bn a year whilst slimming down the operations of the combined bank.

Job losses: To you and I this means that there will definitely be job losses as the result of this merger. There are some rumours of 40,000 jobs expected to go, which Lloyds denies. This would be about 27% of the total workforce of about 145,000 people and looks very, very aggressive. We’ll just have to wait and see – usually rumours that are strongly denied end up being true!

The merger will result in the formation of a huge institution owning a third of the UK mortgage market. The competition and monopolies commission did not stop this as the deal was encouraged and backed by the UK government.

The job losses we fear as the result of this transaction will add to the other expected job losses in the City in 2008 – together this paints a sad picture with many people ending up out of work. I am sure not everyone will have sympathy with the ex-high earners but there are plenty of people in the financial sector who are not earning crazy money and are the primary earners for their family. Losing their jobs will be tough on them.

Financial markets shut down in Russia: In another heavy-handed intervention of the Putin / Medvedev government on the market on Wednesday 17th September, trading in Russia was totally shut down on the country’s two main stock exchanges, RTS and the Moscow Interbank Currency Exchange (MICEX). This comes as the result of steep falls this week of over 8%. The greatest decline happened on Tuesday and amounted to 11-16%, with a further fall of about 3-6% during the first hours of Wednesday before closure.

The main shares that fell sharply were those of the financial sectior – Sberbank (the country’s largest savings bank) and Vneshtorgbank (bank for Foreign trade). Apparently Gasprombank (the bank of the country’rs gas giant) shares are also in trouble having fallen sharply.

There is a regulation in Russia relating to trading markets which dictates that a fall of over 8% necessitates the closure of exchanges until the situation stabilises.

The slump is the second largest crash on the Russian stock market since 1998, the year of huge economic turmoil. Russia’s main exchange indices has fallen by over 50% since May 08.

Trading is only expected to fully resume on Friday 19th September. Trading on MICEX is restarting today but only in limited areas (incl Repos). RTS remains fully closed today.

A question on Gasprombank: What I find quite amusing is the debacle of Gasprombank. How can a bank which is sitting on top of the country’s largest gas producer get into such dire straits as to have its share price nosedive rapidly? My sources indicate that this is due to total lack of any sensible internal bank management. It’s a virtual goldmine but they don’t know how to run it properly.

Hardly unexpected: This crisis has been coming for a while but with Russians stubbornly denying that it might ever happen to them again. The links of the Russian market to the rest of the world economy are not to be underestimated and global ripple effects of the credit crunch are felt throughout.

The other 2 factors contributing to the current collapse in share prices are – the war in Georgia; and the fall in world oil prices.

Additionally, the Russian government has also generated conditions for their own credit crunch through an unchecked consumer lending in the last few years. Credit was freely available for all matter of purchases with no credit checks and only with some basic proof of income.

My prediction: This is going to get much worse shortly. Russia stands to suffer from the properly bubble bursting at any time soon. At the moment the ongoing building boom is unsustainable and is nothing short of a speculative pyramid scheme in property, with easy-come-easy-go money being invested in the housing market on an anticipation of an further unchecked rise in housing prices. These houses and flats are actually standing empty right across Moscow.

Banks which have been riding on a wave of relative economic prosperity in the past 5 years will start defaulting like they did in 1998 as the shocking state of their bad loan portfolio will emerge, and the credit crunch will set in preventing them from obtaining rescue loans from other institutions.

This might get quite nasty. I get no pleasure in forecasting this as the ones who will really suffer are the average Russian consumers. The rich ones have got their money stashed away in Switzerland long ago and won’t care less.

Interesting times continue – as news broke this morning over breakfast in the UK that Lloyds is in “advanced merger talks” with HBOS (Halifax Bank of Scotland). This merger will create a giant UK retail bank out of two considerable players on the UK market.

Over the last week, HBOS shares fell from 300p to about 100p this morning following speculations about HBOS’s weak balance sheet. Rumours of insufficient reserves were vehemently denied over the past few days. However, as in politics, once the loss of confidence sets in, it’s almost impossible to reverse it as everyone believes “there is something in it” and acts accordingly – to sell.

HBOS shares recovered 15% after the surprise announcement about merger talks came out this morning.

The news of the merger will be welcomed by many investors and UK consumers as many mortgages and savings are with HBOS.

More information about the merger progress is expected tomorrow.

AIG to be saved: Fed steps in to arrange an $85bn (£45bn) loan to rescue the insurance giant AIG, as just reported. In return, it is getting a 80% stake in the company.

The other day I made a comment about banks and regulators not seeming to have learnt the lessons of the past. One such lesson I had in mind was central banks (=the Fed) acting as a lender of last resort to failing financial institutions in time of global economic crises. In the 1930ies, the Great Depression in the States was made much more severe for the Feb not stepping in and allowing institutions to fail.

Today, the Fed showed that it can act the part and does remember the lesson learnt in the 1930ies. Bravo.

Lehmans fate: However it does not explain why the Fed did not follow a similar approach for Lehmans. Can it be that the Fed is standing to make money out of the AIG deal, but Lehman is too “toxic” and unpalatable for the Fed? In which case the Fed would seem to be acting like a business, not as a central bank, and arguably carving out a new role for itself on the market? In its logical conclusion, iImagine the Fed or the Bank of England taking a position on the market and short-selling to make a quick buck.

Lucky that Barclays are interested in at least cherry-picking some of Lehmans assets. As the BBC reports, “Barclays does not want Lehman’s “toxic investments in the residential and commercial property markets. Nor does it want Lehman’s surviving, unsettled transactions”. 80% of US’s 10000 Lehmans employees might have a job at the end of it, but this is far less certain for the 5000 working in London.  

Interesting times are ahead for sure.

What a way to start a Monday morning with news of Lehman Brothers filing for bankrupcy and Merril Lynch being bought by Bank of America.

Hardly unexpected though for Merril Lynch. Many in the industry have been expecting something like this to happen since earlier this year as the result of its losses on bad loans in the US mortgage market and the ensuing credit crunch all over the world. There have been all sorts of rumours about the “bad state” of Merrils.

Lehman Brothers is a bit more of a surprise. Reuters has some commentary about just how unexpected and swift the downfall of the bank has been. Ultimately though, the cause of its collapse is the same as the troubles of Merril Lynch and Bear Stearns earlier this year: link

Looking forward: An interesting thing to ponder is, when the world eventually emerges out of whatever global economic calamity we are yet to fully face, will the investment banks and regulators learn the lessons of the noughties? Read the rest of this entry »

I could not help noticing during my recent trips to Russia just how xenofobic some Russians continue to be.

Xenofobia in the past: In my experience, a fair amount of Russians have always been anti-semitic. This is constantly reflected in the day-to-day life and in Russian humour which can be quite cutting to Jewish people. Other minorities also get mocked. The amount of “Tatars”, “Chukchis” and “Armenians” jokes in the past used to be quite prolific. It might still be but I have not been following this closely. I’ll be surprised if this has changed.

Xenofobia lives on: However from what I have observed is that many are increasingly anti-semitic and now also strongly anti-“Southern nations”. The latter is a catch-all category for all ex-USSR republics of the far South, such as Azerbaijan, Uzbekistan, Armenia, Tadjikistan, etc. These days, a very large number of migrant workers come to work in Russia.

The unadulterated anti-Semitism seen today is explained by some as follows: “the Jews sold Mother Russia <to the West, to the Devil – delete as appropriate>”. Jews are blamed for having illegally acquired, for currently owning, and for “irresponsibly squandering” the whole country’s riches. When confronted to back up such strong claims, I have only heard one reply in return – just look at the oligarchs’s surnames, they are all Jewish-sounding. Read the rest of this entry »

Had a very heated argument around the dinner table the other night about politics when parents came to visit. Bad idea, I know – we talk politics and religion with them but mercifully, sex is off-limits. Let’s keep it that way too.

Anyhow what got people wound up that evening was a question whether OAPs (Old age pensioners, to you and I) should be entitled to free bus passes. It’s not a new thing, of course, free bus passes have been around for a bit.

Essence of the dispute: I argue that it’s a populist measure by the government to secure a vote from a large electorate.  The older generation of course thinks it’s a brilliant idea coz they get something for nothing.

What’s the problem with that? Not all OAPs actually do need a free bus pass. Many don’t travel. Some cannot even be bothered to go and get the bus pass (I personally know of some). So, whilst the government is saying they are offering this package free of charge, at the cost of £m to them, in reality the take-up is smaller and costs them less. And it’s a great vote winner. So all in the name of spin, as ever with Labour. Read the rest of this entry »

Pages

September 2008
M T W T F S S
    Oct »
1234567
891011121314
15161718192021
22232425262728
2930  
Bookmark and Share