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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.

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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.

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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

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 »

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