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Happy New Year to you, my reader.

I’ve not been blogging since before Xmas. To some extent, there is so much negativity around in news headlines that it’s all a bit of a blur. So I’ve been focussing on work – our little IT business – and planning 2009 hiking challenges around Britain, one of our great hobbies. This certainly does make one feel much more positive and I think it’s crucial at this time to have an aspiration which takes you away from the decidedly average economic outlook.

I am extremely happy to see that although companies are more careful with their money, the IT sector is still quite buoyant – so it is not all doom and gloom for us at the moment. My first web-based project should go live at the start of March and this is keeping me very busy. It’s also terribly exciting to know there will soon be a website out there that I project managed. Read the rest of this entry »

My other half and I have recently started a small IT consultancy business. Earlier this week, I went on a 3 day business start-up course to recap on fundamentals of law, marketing, finance and accounting. The course was organised by a UK organisation called Business Link. Its objective is to provide free advice and coaching to new start-ups.

I was a bit sceptical of how useful the course was going to be, but I have to say it was quite good. I feel that it has left me feeling inspired to go out there and make money. They say that at least 50% of small business fail – it must be more than that though – and it’s not difficult to see why this is so. Our tutor said that we as attendees maximised our chances of being in the successful 50% by coming on this course. Judging by the responses of fellow students I am inclined to believe him.

People set up on their own for all sorts of reasons, but it seems the desire for independence and flexibility is one of the biggest drivers. However many are ill-prepared. The students on this course were full of enthusiasm and great ideas. Unfortunately a few were in for a rude shock when it came to the basics of accounting and finance. For example, as we were doing a cash flow forecasting exercise, there was a sharp intake of breath from one lady. She looked around shocked and announced that she just realised she could not implement her business idea for at least another year – she forgot about the costs of buying or leasing a van and other key equipment. And she already printed labels and logos for her products! She is lucky that she realised the problem now and not after investing even more into her start-up. But many more would not have a clue and launch straight in.

Granted, it is scary to make this step at the start of a recession however well-prepared one might be. The people I know – my ex-colleagues – are keeping their heads down and holding onto their corporate jobs for dear life. I really hope there would be no going back for me. I spent so many years dreaming about working for myself that making a U-turn now and running for the relative safety of full time employment is the last thing that I want to do.

It’s all in the mindset, it seems. Over the years, I have lost count of the “final straws” in my last job with my old employer, but I never thought I’d actually do it. Watching myself getting progressively more miserable has eventually tipped the scales in favour of drastic action. So here I am facing the unknown and the daunting ahead, trying to contain my excitement.

Doing a basic SWOT (Strenghts, Weaknesses, Opportunities and Threats) analysis on any new start-up is showing that Recession is a threat. However I firmly believe that it should also teach us rigorous cost control, discipline and focus, which will give us an edge in future years. Running a business with few frills but delivering a fantastic product or level of service to a customer is a very very worthwhile objective to achieve at any time of the economic cycle.

Wish us luck – and if you, my reader, need an IT project manager, maybe we should talk? 🙂

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

Yesterday, the US Senate backed the financial bail-out bill amounting to $700bn (£380bn). The essence of the plan is to buy up bad debts in order to try and stabilise financial markets through restoring confidence that no other institutions will collapse as the result of existing debts. The ultimate objective is to to keep banks lending – so that the global credit crunch does not take an even stronger hold and completely paralyze the economy.

In order to become effective, the Houe of Representatives have to approve the bill as well. Earlier, this bill failed to pass the House of Representatives vote. Since this first failure, extra modifications were added to make it more palatable to the public, such as additional guarantees of the amount of savings US will guarantee, and tax breaks for smaller businesses to encourage the economy.

At the next hurdle, the bill might still be rejected. There is of course pressure (or strong encouragement) from President Bush and both presidential candidates for it to be passed, which might sway the vote to some extent. But what could the outcomes be of the bill being (a) passed – or (b) rejected – on the markets in the longer term?

Bill passed: The US government will effectively become the owner of devalued assets of the financial firms, rescuing the latter from the mess they were responsible for in the first place. 2 side effects might occur:

  • Whilst the bailout might create greater confidence in the markets of no more imminent banking failures, the US state will be saddled with a huge amount of non-performing (but not completely worthless) assets and hence some degree of increase in its budget deficit. This increase will be particularly large if the US housing market slumps further, making these assets even less valuable. The increase in budget deficit will filter through into the real ecomony and might trigger interest rate rises, deterioration of the economic climate and a deepening of the recession which is already starting to take hold in the US. The recession can be quite protracted and painful as the government might resort to helping banks further, even the technically bankrupt ones (kind of like keeping a dead patient on a life support machine for the sake of preserving appearances). This brings to mind a parallel with the protracted recession in Japan in the nineties where (to the best of my knowledge) the government’s continuous intervention to prop up firms just prolonged the economy’s problems.
  • The bailout reinforces the perception that banks can behave totally irresponsibly and take any unjustified risks, since they will be rescued nevertheless. So the problem will occur again in future – because no-one ever learns! And we will pay for it again.

Damned if you do?…

Bill not passed: The crisis of confidence will resume but magnified many-fold. There will almost certainly be more high profile bankruptcies. The impact and the shock of it will be severe and harsh with wide ranging negative ecomonic implications for the US and the world alike, and it is bound to be very challenging on the people living through it, with an increase in unemployment just for starters. The global credit crunch will squeeze everyone even more strongly.

A part of me keeps coming back to this thought though – in this case, although the resulting downturn will undoubtedly be very severe, maybe it will not be as prolonged? Maybe with careful macroeconomic management after all the bankruptcies have happened, the US economy will actually have solid foundations on which to build long term recovery?

The collapse of the financial system might be a price too high to pay for this though.

Damned if you don’t, then.


I welcome people’s feedback and comments on the above.

Copyright 2008 by CuriouslyInspired

It’s pretty scary out there in the world of finance right now. Apocalyptic predictions of further meltdowns are rife and, to be honest, even if we ignore the scariest over-the-top forecasts we know that we are in for a tough ride.

I was getting carried away 2 weeks ago commenting on the events in the banking world as they were unfolding, but taking several days off temporarily cured me of this obsessive watching and recording of the crisis. I might come back to that in due course, but meantime I wanted to refocus instead on my own perspective of events, which really is the purpose of this blog – in this case to talk about bad staff management techniques I have seen in the banking industry.

I spent 10 years working in banking in various support roles, most recently in project management and IT. It was great around 2000 – money was abundant and life was fairly easy. Maybe not 9 to 5, but looking back it feels like we got paid quite well for doing an average job and not straining ourselves beyond sensible limits. To be honest there seemed to be a fair number of people around who were getting away with not doing anything much and still got paid. What we did was a skilled job, of course, requiring knowledge of finance, accountancy, or IT, and there was of course a degree of stress attached to delivering things correctly and on time, but generally it was a time of plenty – of money, bonuses, opportunity, and jobs all easy to come by. But then it got a great deal harder. Read the rest of this entry »

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.

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.


August 2020
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