You are currently browsing the tag archive for the ‘Banking collapses’ tag.

Yesterday, four former bosses of UK’s RBS and HBOS (former HBOS chief executive Andy Hornby, former HBOS chairman Lord Stevenson, former RBS CEO Sir Fred Goodwin and former RBS chairman Sir Tom McKillop) faced the Treasury Select Committee for a questioning session about their role in the financial meltdown and the disasters that came to befall their banks.

The key snippets of this session, which has been dubbed “the show trial” for all the public apologies it started off with, can be found here.

Read the rest of this entry »

Advertisements

Most of us feel that auditors should indeed be worried now. After all, none seem to have been raising any alarms over the extent of bad loans accumulated by major financial institutions, or over risks that banks exposed themselves to through entering into derivatives contracts they claimed they understood but did not. And now many hold auditors at least partially responsible for the ensuing debacle.

For some audit firms, the time of reckoning seems to be approaching fast. However the degree of their concern over legal action will depend on where the firms are operating, and global or US-based firms are at greatest risk of coming under close scrutiny in the courts of law.

Read the rest of this entry »

Here is something that did not surprise me at all today.

The UK government, it appears, knew perfectly well that the Icelandic banking system was heading for a meltdown – as recently as March 08. But it did nothing to help out some of the UK savers.

Back then, the Icelandic government was seeking help for its banking system as the confidence was starting to collapse and it needed money. Mervyn King, the governor of the Bank of England, commissioned several reports to assess the state of the Icelandic banking sector, and refused to help out when the results that came back were – predictably – not very reassuring.

Failure to act: Discussions earlier on in 2008 on the possibility of turning UK operations of Landbanksi, the now-collapsed bank, into a UK subsidiary, did not reach any conclusions. This means that whilst the UK government was aware of the impending danger to Landbankski’s UK savers, it failed to negotiate a status change for this branch which would have meant savers would have been covered by the UK deposit protection scheme when the collapse inevitably happened. It failed to act to aleviate the inevitable fallout.

Liberal Democrat treasury Vince Cable is now calling for an inquiry to understand the extent of UK government’s knowledge about the forthcoming crisis.

The government has recently confirmed that it will back private investors’ money, but this leaves charities and local councils at risk of losing all their money.

The savings debacle: Now, a huge amount of charities and public sector bodies have their money locked in collapsed Icelandic banks. Here is the quick list of councils that caught out in the meltdown.

Some councils have been warned: It appears that many did have a prior warning about the impending danger. Landsbanki, Glitnir and Kaupthing bank were all downgraded in Feb – March 2008 by credit rating agencies. The confidential advice to move savings elsewhere was passed to many councils by their advisor, Sector Treasury Services.

Some acted on this advice and moved the investments; some could not, as money was locked in long term deposits. Others – and this is the shocking bit – continued ignoring financial advice and even increased deposits made. This, unfortunately, just confirms some council’s incompetence in financial management.

Read more details here.

So, tell me something I did not know? The UK government that is wilfully closing its eyes to the inevitable and refusing to act early, and UK councils that do not competently manage their money. What a shambles.

 

Copyright 2008 by CuriouslyInspired

As the global credit crunch and deterioration of confidence is starting to bite Russia harder, Russian banks are experiencing panic deposit withdrawals. Add to this the rapidly falling stock markets – and you have a dangerous cocktail of financial instability.

Customers want their money back: Last week, Russian bank Globex banned depositors from taking their money after a run on its deposits sparked by crumbling confidence. It is the first bank to suffer this problem in 2008 – but undoubtedly not the last. A number of other banks also experienced an unexpected rise in people withdrawing their money and closing their accounts. Long queues of investors desperate to have their cash back are starting to form outside smaller banks. Many failed to get their money as bank operations were suspended. So this crisis is not doing anything for the average consumer who is now seriously worried about losing their hard-earned money.

In the last couple of months, three banks have been forced into mergers because of the liquidity crisis brought on by the global credit crunch. There is anecdotal evidence that banks are being bought for nominal sums, one of them quoted to have been sold for $5,000.

Bailout Russian style: The Russian government’s financial bailout package of $120bn is aimed primarily at large captive state-controlled institutions such as Vneshtorgbank (VTB – the Bank for Foreign trade) and Sberbank (the Savings bank). The government also intended to spend a portion of it on shares purchase to support the tumbling stock market, but not so much at lending activities. Overall however, there seemed to be insufficient detail and transparency about the total package which caused the market a lot of concern.

The package itself is an astronomic size of money in terms of its size relative to Russia’s GDP. For comparison, US’s $700bn bailout is around 5.5% of its GDP (US GDP is approx $14trillion), whereas Russia’s bailout is about 10% of its GDP (Russia’s GDP is approx $1.2trillion). Since the bailout has been announced in September, it has had little impact on the Russian stock market, which fell down around 60% from its high in May 2008.

The crash of Russian stock market has been the most dramatic event of all the world’s stock markets collapses in 2008.

Market correction: In itself, the Russian crash is a huge adjustment back to the shaky economic fundamentals. Russian economy is still set to grow by about 7% in 2008 according to the IMF. However, the foreign investors who were attracted by speculative expectations of high returns in Russia are all gone and the money is gone with them, making the huge market bubble go “pop” spectacularly quickly.

Financial outlook: This is tricky as there are a few moving parts. Oil is a key one, but I am not going to touch upon it today, only noting that a fall in world oil prices is causing major concern to Russia. 

From the point of view of banking, we are seeing the start of consolidation of the Russian banking sphere, and there is a fear, which the government will strongly deny, that the financial situation is pretty grim: the major concern is that widespread bank failures will spark panic. Still, the population is pretty pleased about one thing – that a bunch of super-rich Russian oligarchs will lose their ill-gotten money in the stock market crash. That’s some consolation, isn’t it?

 
Copyright 2008 by CuriouslyInspired

It’s fascinating to see how much everyone around the globe is presently applauding Gordon Brown, the UK’s PM, for coming up with “the plan” to rescue us from the economic meltdown. Features of this plan are now being adopted by other governments in need of a magic wand to get them out of the financial abyss.

UK plans: The plan amounts to the UK Government formally taking a stake in UK’s banks whilst giving them money (£37bn to three named banks – RBS, Lloyds and HBOS) to recapitalise and hence become more resistant to the current market volatility and the ongoing liquidity crisis.

This was received exceptionally well by the world’s markets. FTSE 100 is positively rocketing upwards – on Friday it closed below 3,900, it now stands at 4,400, up well over 12% in just 2 nerve-wracking days. European and Asian indices are also up very strongly.

US adjust the approach: US’s bailout package of $700bn, which was originally intended just to buy off bad debts off failed banks, was badly received by the markets earlier in October and failed to stem the fall of american indices which dragged the world’s markets down with it. Now the US government is turning towards the UK-style idea and is planning to recapitalise 9 banks (amongst them Goldmans and Morgan Stanley) using $250bn of the bailout pack for this.

This will be deeply humiliating to Goldmans and Morgan Stanley which until now have been the last 2 “pure” investment banks left on Wall Street. Goldmans, in particular, was initially trying to raise its own capital to ensure its survival, whilst Morgan Stanley was looking for a merger. I wrote about that earlier in Sept.

US markets strongly welcomed US’s change in thinking on the rescue plan and Dow Jones is finally on the up.

Knight in shining armour? Gordon Brown is getting credited for coming up with the plan that is going to work, where all else failed to date. Paul Krugman who got awarded the Nobel prize for economics, has been praizing Mr Brown as the one who might have saved the world’s financial system: more details here.

But we must not forget, before we get carried away on the sudden euphoric wave, that:

  • Gordon Brown failed to prevent UK entering the credit spending spree in the first place, creating conditions for a very sharp comedown to earth which are only starting to bite now
  • He failed to get the regulators involved when alarm bells have been ringing for months as banks were increasingly entrenched in runaway activities which were hardly regulated

And thus we must consider Gordon Brown’s achievements and undoubted strong leadership skills in the last few days in light of the fact that really, we should not have been here in the first place.

What is always impressive is the well-oiled Labour spin machine which helps Mr Brown deliver his recent “save the banking world” speeches so very well. UK is newly rebranded as “rock of stability and fairness”. The stuff that would normally make one cringe was swallowed by this week’s hungry for reassurance markets, hook line and sinker.

A very bitter pill: As for the bailout itself –  no-one likes the sound of it. In fact we all loathe the sound of it. And I for one thought in the last month, just let these banks fail, as “damned if you do, damned if you don’t” – bailout or not bailout – it will hurt in both cases. But economic tools and alternatives being rather thin on the ground, I agree with some of my recent commentators, I have come round to semi-accepting the inevitability of this bailout. This is mainly because everything else I have seen suggested would have implied an HUGE social and economic upheaval. Like write off everyone’s debt and assets, for instance.

What this means is that as the world’s order is shifting towards quasi-socialist principles and a very strong government hand in regulation, we are not trying to shake the foundations of the existing society. Call me a coward but I don’t feel there is a call for that at this stage.

Yet from the UK’s point of view, it is extremely disappointing to see Gordon Brown take so much credit for an event that he did not manage to prevent.

 

Copyright 2008 by CuriouslyInspired

I don’t have any answers. And today, I feel the weight of fear and uncertainty over the impact of the Global Meltdown on people closest to me. The government measures do not seem to be working to stop the systemic panic that has taken hold of everyone. Markets are in freefall across the globe.

Lehman’s CDS settlement: Part of the reason’s for today stock market crash is the fear surrounding the need to settle Credit Default swap (CDS) protection on Lehman Brothers’ debt. This is due to happen today. The size of financial contracts under settlement is $400bn.

CDSs are a type of financial insurance policy (loosely speaking) written by a financial institution to protect the holder against the risk of a specified party (in this case, Lehman Brothers) going bust. Now that Lehmans is bankrupt, the holder will want this policy paying out. If the payout does not happen, the holder of the policy is at massive risk as it does not get the money it was counting on. The payout might also not happen if the writers of the policy do not have enough cash to pay all obligations. If things go sour, this will impact banks which have so far not been in the spotlight being the writers of these contracts, or the holders of these contracts – such as JPMorganChase.

There is uncertainty that this settlement can take place today, given the state of world’s markets and absence of liquidity. If it goes wrong, this might kick off a further chain reaction of negative events. 

Gloomy thoughts of the day: Going back to the economy, here is what I fear might happen – and I do feel quite negative today – we can check how close or far off the mark I was later this year:

  • Lower limit of indices: Only 2 days ago I speculated (at home) that FTSE 100 will stop before crashing through the 4000 psychological barrier. This has already taken place – it’s trading below 4000 – so the reality is worse than my fears. So should FTSE 1000 at 3000 be the limit?
  • Markets shut down for weeks: We have already seen Iceland and Russian markets closed. Will US and UK and other major stock markets follow suit in an effort to curb panic?
  • Sweeping reforms: There might be major reforms taking place in the economy and finance. I cannot discount the possibility of drastic steps such as freezing all savings as reforms are carried out. Your money might not be safe wherever it’s held. Our Governments have guaranteed savings so far – but will they be able to stand by that guarantee? I fear they could abandon it if they really had to.
  • Pensions and Investments: Any stock-market reliant savings held in funds, have already lost a massive chunk of their value. My own savings held in funds are down 25%. People close to retirement are going to struggle to live on what is left. Savings are not safe wherever they are. If there is something akin to a currency reform, then all savings can be taken away anyway as part of that. How much faith do we have in the Government’s guarantee on existing deposits? I would not trust it 100%.
  • More bank failures: I am sure we’ll see a few more of these, causing problems with existing savings lost or frozen
  • Recession: Fears deepen about entering a major recession akin to the Great Depression of the 1930ies. The IMF is speculating this might last until the end of 2009. Could it be longer? Could it be years of hardship for people who worked for decades on end to secure their future?
  • People take to the streets: Wouldn’t you – if things got very bad? It’s the likes of you and I who can topple governments, if we are truly p*ssed off.

Because at this stage, no-one seems to really know what to do next.

 

Copyright 2008 by CuriouslyInspired

As the BBC reports,

Iceland has suspended trading on its stock exchange in an attempt to prevent further panic spreading throughout the country’s financial markets.

Iceland’s stock markets will be shut down at least until start of next week. The reason for this unprecedented move is to give the government some breathing space to decide what to do next, and attempt to take the panic out of financial markets by simply keeping everyone away for a while.

This leaves Iceland in “good company” with Russia, whose stock markets were shut most of Wednesday due to huge falls in share prices, and for at least an hour on Thursday. In contrast to Wednesday, Russian stock markets were temporarily closed due to massive gains. Lucky them (but will it last?)

Collapsed banks update: Iceland is in a total financial mess with all its top three banks either nationalised or in receivership. Glitnir, which the government was aiming to part-nationalise earlier, is now in the hands of liquidators, as the government realised it was in too much trouble for the state to take on. Now Kaupthing, the largest bank of the three banks most in trouble, has been nationalised in addition to others.

Cause of troubles: I wrote about the causes of Iceland’s troubles very recently. “Troubles” is a bit of an understatement. People in the capital Reykjavik have already staged one demonstration this week and there is bound to be more civil unrest to come. Iceland might not have money left to import food stuffs for starters, so the collapse of the financial sector will have a very real impact upon everyone.

War of words with the UK: Gordon Brown and the Iceland’s PM Geir Haarde are engaged in a bitter battle of words at present. The UK has large investments in Iceland accumulated over the period of the Icelandic financial market boom. Now that the bubble has collapsed and banks have gone bust, Gordon Brown wants some guarantees that Iceland will honour UK savers’ deposits in collapsed Icelandic banks, as UK taxpayers will otherwise have to foot the bill in addition to bailing out British banks. Usually Iceland would have offered a guarantee of $28,400 per account but this has not been forthcoming in this case for the UK investors. The UK Government froze Iceland’s top bank Landsbanki’s financial assets in the UK. Icesave, the online savings bank with 300,000 UK customers, is a subsiduary of Landsbanki.

Geir Haarde is retaliating by saying, as Bloomberg reported today, that

the U.K. government is to blame for triggering the crisis when it used anti-terrorism laws to seize the assets of Icelandic banks in the U.K.

Iceland is also extremely unhappy that none of its usual Western partners have been forthcoming to lend it any money to help in its current crisis. It has had to look to other partners, including Russia and the IMF (International Monetary fund), to obtain money.

The row between the two PM’s is not serving to calm the panicked markets. The UK share prices is in freefall today and the pound is also falling against many key currencies.

Icelandic Currency collapsing: Iceland’s currency, the krona, was pegged to the euro before the crisis hit, at a rate of 131 krona per euro. Now that the government has stopped attempts to support the falling currency and formally abandoned the peg as unsustainable, trading conditions before markets shut down indicate that the currency is now worth about 255 krona per euro. That is a 91% drop in the value of the krona over the course of less than 2 weeks.

Bankruptcy: What is happening is pretty unprecedented for this country: Iceland is now facing bankruptcy. It is not in a position to repay the debts its banks have clocked up.

 

Copyright 2008 by CuriouslyInspired

The main Russian stock exchanges have been shut down for large parts of Tuesday, as the BBC reports. Yesterday Russian stocks lost around 20% on the RTS and Micex exchanges. Newest legislation passed by the Russian government now dictates that if stock market changes during the day by more than 5%, or by over 10% at market open, trading will be suspended. There used to be a higher threshold of suspending trading.

A Russian Bailout: The Russian president has now annouced that Russia is going to offer a bailout package of $36bn to the largest banks of the country. Unsurprisingly, the largest banks are in trouble.

Why is this necessary? There is rife speculation about why Russia needs to close its stockmarkets during volatile periods. Some see it as typical heavy-handed intervention and meddling – a sign that an incompetent government does not trust its own stock markets to sort itself out. I might have held this view myself 2 weeks ago when this first started happening. However today we see that stock markets around the globe cannot be relied upon due to the totality of the global meltdown. So perhaps the Russians’ response is not so outlandish after all.

Another view was that the Russian government was going to use the markets downtime to find money to buy up troubled firms after the exchanges’ reopening. Critical as one might have been of this intent before, we now see that governments across the world are nationalising all matter of banks in a hurry.

A likely intent is to try and calm investors’ panic. It’s not likely to work with bad news coming out left right and centre at the moment.

Total meltdown: The RTS index has slid by 65% from its high in May 08. This has been the largest fall amongst all of the world’s stockmarkets. This has demonstrated amply that the Russian stock market was just one huge bubble waiting to burst – the economy is in disarray. Some analysts say that Russian “internal factors” (war with Georgia, government’s short-termism and incompetence, falling production of gas, underinvestment into industries to name but a few) are at least 50% to blame for the current collapse.

Carried away: The Russian crisis has been coming for a long time. And same as with all other investors around the globe, no-one expected that the good times would actually end. The point I want to make is that with Russia, the economy was always less sound compared to… well, almost everyone else. And arguably, Russians got carried away with their illusory wealth more than the rest of the world did. Which will make their landing down to earth possibly even harder.

 

Copyright 2008 by CuriouslyInspired.

Yesterday was a very, very bad day on European stock exchanges, with key indices sliding down massively. To give some examples – UK’s FTSE 100 down 7.8% (the largest fall since 1987’s crisis), France’s CAC 40 down 9%, Germany’s DAX down over 7%, Russia’s RTS down over 19% resulting in Russian stock markets being shut down today again. Asian markets were also sharply down. There are more market casualties – Fortis (a Dutch-Belgian bank) and Hypo Real Estate (a German bank) – and seeking urgent rescue either through cash injections or a quick merger.

Iceland continues to struggle under the weight of its massive banking crisis, trying to avoid national bankruptcy, with the second largest bank Landsbanki now being nationalised – this is in addition to Glitnir about which I wrote recently. Thus, this week the US economic calamities have been demonstrated to well and truly impact global markets – not that we have doubted this earlier.

Cause of the panic: The European stock market slide is attributed to the lack of a coordinated economic front amongst EU’s governments which does nothing to restore confidence in the system at the time when emerging economic data is implying that US is entering a recession. US’s recession will impact the world’s economy due to its global nature. European governments are pursuing their goals in isolation and cannot have seen the depth of the crisis we are about to enter. According to this article, we are staring into the abyss of a systemic collapse, with markets at risk of closure. One recommendation is for the European central bank to lower its interest rate immediately and start acting like the lender of last resort to companies in trouble. Lowering the rate of interest should kick off inflation, one side effect of which will be to reduce the real value of outstanding debt, making debt obligations easier to bear.

UK is also showing deteriorating economic figures, prompting statements that it too is now technically in recession. Meanwhile, European countries are introducing their own measures to address the credit crisis and resulting stock market plunges, but there is no overall agreed policy. This must be reflective of a panic that set in amongst governments, each trying to protect their own skin in the eyes of the very concerned electorate by introducing quick measures. Divided, they stand. Read the rest of this entry »

I did not know much about the economy of Iceland until 2 days ago and confess I still only know the basic facts. And unless you are from Iceland or have a specialised interest in North European economies, you are probably in the same boat, my reader. However this issue captured my interest yesterday in light of my recent note an outside chance of US Government bankruptcy linked to the bailout – as I was trying to contemplate its impact.

A small economy: Sure, Iceland is a very small economy, but it is – or was? – a well-off country. Its population is about 300,000 as of mid-2007 but boasting a (purchasing power parity) GDP of $40,400 per head of population. It compares very well to UK’s $35,000 and US’s $45,800 per capita GDP. (source: CIA statistics referred to in Wikipedia, 2007 estimates). For the number-crunchers amoungst you, this is a GDP of $12bn. Another figure quoted sometimes is £20bn. This is calculated using a different method – using an official exchange rate – but is also a valid number.

Days of plenty and the outcome: In the past few years the Icelandic economy has been undergoing a huge boom fuelled by the financial sector. Iceland paid high interest rates so was very attractive to investors. Its banks were finding it easy to borrow heavily from low interest rate countries, and then re-invest in foreign business opportunities (mainly the UK). The BBC described this phenomenon as the carry trade. This development can be seen as a manifestation of the global credit bubble finding another outlet to develop over the past few years.

Huge debts: As the result, Icelandic banks managed to accumulate $120bn worth of liabilities. Depending on the method of calculation, this is either 6 or 10 times the GDP amount and it is a catastrophically high figure. Why is this a problem? Because Iceland does not have the income to service interest payment on such a colossal figure, let alone repay it. So the Government will not be able to bail out everyone who needs a helping hand.

Just a few days ago, the 3rd largest bank Glitnir has been nationalised. The other 2 largest banks are currently running the risk of bankruptcy with no bailout to rescue them.

This was expected: Concerns have been voiced over the past few years over the unsustainable nature of the financial boom and many have been warning this was a bubble that was bound to burst in a nasty way. Well, it has now, triggered by the collapse in confidence following September events across the global stock market. The Icelandic currency, the crona, has now fallen 20% against the dollar in the past few days. Inflation is expected to spiral shortly and shops in the country already warned they won’t be selling imported goods anymore. The impact will hit foreign investors if their loans are defaulted on. In particular, UK investors are vulnerable.

On the plus side for Iceland, its Government finances are healthy, and its the non-financial sector is reported to be solvent. How this small nation will weather an unprecedented global financial storm that has broken over its head in the last few days remains to be seen.

Comments and thoughts on this post welcome.

Copyright 2008 by CuriouslyInspired

Pages

October 2017
M T W T F S S
« Nov    
 1
2345678
9101112131415
16171819202122
23242526272829
3031  
Bookmark and Share