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The Credit Crunch
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KellydandodiOffline
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PostPosted: 16-09-2008 13:16    Post subject: The Credit Crunch Reply with quote

To all appearances it is eye-popping that Lehman Bros. et al have gone under - what could be the agenda, if any, at work here?
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jimv1Offline
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PostPosted: 16-09-2008 15:15    Post subject: Reply with quote

There's a whole thread 'collapse of the US economy imminent' a few pages back.
It probably deserves a bump.
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rynner
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PostPosted: 16-09-2008 17:31    Post subject: Reply with quote

jimv1 wrote:
There's a whole thread 'collapse of the US economy imminent' a few pages back.
It probably deserves a bump.

But this financial meltdown will affect the whole world, even if it was a few snake-oil salesmen in the US that started it.

Prices are soaring, jobs are being lost, banks can't be relied on...

The great depression was before our time (for most of us, ie, nearly 80 years ago), but it looks like we might be starting another one.

All the papers have in-depth articles about it, far too many to quote here.

What with this and Global Warming, we may have bitten off more than we can chew this time...

We're doomed, Mr. Mainwaring! Shocked
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RavenstoneOffline
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PostPosted: 16-09-2008 17:38    Post subject: Reply with quote

I think it's all media led. They've been telling us for nearly two years that we're heading for negative equity and spending too much money. They've just scared people into not moving house, spending less, which is putting up prices.

Look at what's happened recently. The XL fiasco - apparently due to the 'credit crunch' and rising fuel costs. Except the auditors over two years ago wanted to investigate what they considered to be dodgy financial practices, but were called off. The current Lehman crisis, apparently more to do with the owner awarding himself pay rises the company couldn't afford, and him refusing to sell the company for a reasonable figure, because he wanted more money.

So, nothing to do with the credit crunch, and pretty much everything to do with greedy financial wrong-doings. Which should be far more newsworthy, but Gods forbid the newspapers should start report actual news when they can just make it up. Rolling Eyes
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rynner
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PostPosted: 16-09-2008 17:55    Post subject: Reply with quote

Ravenstone wrote:
I think it's all media led.
.......
The current Lehman crisis, apparently more to do with the owner awarding himself pay rises the company couldn't afford, and him refusing to sell the company for a reasonable figure, because he wanted more money.

So the media led us to the Lehman crisis?! Shocked

I don't think so!
Wink

Q&A: Lehman Brothers bank collapse

Wall Street bank Lehman Brothers has filed for chapter 11 bankruptcy protection, rival Merrill Lynch has sought refuge by selling itself to Bank of America, and insurance giant AIG needs emergency funding.

The collapse of Lehman has triggered turmoil in global financial markets, but the repercussions go much wider.

How does it affect me?

Nobody has a Lehman Brothers cheque book or current account. The company is an investment bank that specialises in big and complex deals and investments.

Despite this, Lehman's collapse and the troubles of other financial institutions will probably be felt by millions of people around the world - at least indirectly.

Most of our banks and pension funds have dealings with Lehman, or with firms like hedge funds that traded extensively with Lehman.

Unwinding Lehman's complex deals will take months if not years. During that time the global financial system will be snarled up. Many banks won't know for sure how much they are exposed to Lehman, and will have difficulty freeing up the money in those deals.

This in turn is likely to intensify the credit crunch, with potentially dire consequences for businesses and consumers.

And the dramatic collapse of Lehman Brothers has also shaken the financial markets, with share prices slumping around the world.

You will feel the impact even if you are not a banker or shareholder.

Your pension fund may have a wobble. Your employer may find it more difficult to do business. And you yourself may have more difficulty getting a personal loan or mortgage.

Are any other firms in trouble?

Well, for starters there is Merrill Lynch. US authorities and many bankers feared that after Lehman's demise the attention of investors and speculators would have moved to Merrill.

The bank hopes to find safety under the roof of banking giant Bank of America.

The biggest worry, though, is insurance giant AIG. The company is running out of cash to cover its losses and has asked the government for an emergency bridging loan, reportedly to the tune of $40bn.

If AIG is in trouble, it would directly affect millions of consumers and companies around the world. It would also hurt the whole financial system, because AIG is in the centre of a web of complex financial deals.

And compared with AIG, the crisis surrounding Lehman is small beer.

Why did Lehman fail?

Lehman Brothers was the fourth-largest investment bank in the United States.

It was considered one of Wall Street's biggest dealers in fixed-interest trading and was heavily invested in securities linked to the US sub-prime mortgage market.

With these investments now shunned as high risk, analysts say it was inevitable that confidence in Lehman Brothers would likely be hit - particularly after the collapse of Bear Stearns earlier this year.

etc.....

http://news.bbc.co.uk/1/hi/business/7615974.stm
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RavenstoneOffline
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PostPosted: 16-09-2008 18:32    Post subject: Reply with quote

rynner wrote:

So the media led us to the Lehman crisis?! Shocked

I don't think so!
Wink


No - the Credit Crunch.

Lehman, according to one report I heard, was due to the owner awarding himself the massive pay rises the company couldn't support, and refusing to sell the company for a realistic figure, choosing rather to hold out for a figure far higher than the company was worth.
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rynner
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PostPosted: 16-09-2008 18:57    Post subject: Reply with quote

Ravenstone wrote:
rynner wrote:

So the media led us to the Lehman crisis?! Shocked

I don't think so!
Wink


No - the Credit Crunch.

The Credit Crunch came from too many banks, etc, investing in US sub-prime mortgages. (see above). This left many of them holding millions in effectively worthless stock, and those that were most exposed (eg, Lehman) went to the wall.

Other banks (eg HBOS in the UK) are also coming under serious pressure now.

Anyone not worried about the credit crunch doesn't really understand it.

My savings are divided between two big institutions, neither of which seems very vulnerable at present, but I'm keeping my fingers crossed...

Luckily for me I do not need to buy or sell a house, raise a loan, or look for a job, but there are millions who do, and they will be affected very seriously.
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AbendsternOffline
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PostPosted: 16-09-2008 23:32    Post subject: Reply with quote

What I wonder about is those two building Societies, Cheshire and Derbyshire being 'rescued' by the Nationwide after apparent pressure from the government (or so suggested Moneybox on R4 last Saturday). The presenter was suggesting that the government was anxious to avoid another N.Rock-type sitch, but I wonder how they could actually manage to persuade the NW to do this, given that there are EU rules about state aid.

For their part, NW are painting it as an act of kindness, but being a former Portman customer (let's just say I'd happliy give the windfall back if they de-merged!) I'm not so sure. The merger/acquisition seems to have been cleared by the competition commission although the number of Building Societies appears to be constantly decreasing.

Quote:
The Financial Services Authority has activated rarely-used powers to allow the Nationwide Building Society quickly to push through its mergers with the smaller Cheshire and Derbyshire building societies without seeking approval from their members.

The mergers, announced on Monday, will see both the Cheshire and the Derbyshire absorbed by the Nationwide by the end of the year, much faster than typical mergers between building societies. Both mergers are making use of special powers in the Building Societies Act that enable the FSA to approve a building society merger without a vote by members if the watchdog feels the deal is in their best interests.

Graham Beale, Nationwide’s chief executive, said the Cheshire and the Derbyshire had approached the lender about a possible merger after the boards of both societies separately concluded they were likely to face continuing financial difficulties from the housing slump and credit market turmoil.

“This has been driven by the boards of those two organisations,” he said. “The FSA have been aware of the dialogue and we needed their support in terms of approving the structure of the transaction.”

The deals are evidence of the difficulties that the credit crunch has caused among building societies, which are facing a squeeze due to the increased cost of raising funding in the wholesale markets, intense competition for retail deposits, and the slowdown in the housing market which is leading to rising bad debts. Unlike publicly traded banks, building societies are owned by their members and can find it harder to raise fresh capital to cover losses.

The enlarged Nationwide will have assets of £191bn, retail deposits of £122bn, 1,000 branches and 15m members. It plans to keep the Cheshire and Derbyshire brands and branch networks, though will absorb the staff of both head offices over time, potentially leading to job losses. The Derbyshire employs 470 people at its head office, while the Cheshire employs 356.

The Derbyshire’s approach to the Nationwide was triggered by the society’s realisation that it was likely to record a loss of £17m in the first half of the year, and that further losses were likely unless conditions in the markets improved. The Cheshire, which recorded a £10.5m pre-tax loss in the first half after a commercial property loan went bad, also concluded that a merger with a larger lender was in its best interests.

Nationwide said the mergers reduce its core Tier 1 capital ratio – a key measure of balance sheet strength – by 34 basis points, but that it expected to rebuild its capital reserves by the end of the year through the retained profits of the enlarged group.

Mr Beale said the Nationwide had not received approaches from any other building societies, and was not in talks with any other lender. “It’s important that Nationwide is not the lender of last resort in the sector,” he said. “But we do think in the current climate it’s responsible to maintain a strong and healthy building society sector.”

Under the Building Societies Act, passed in 2001, the FSA is allowed to give its approval to a deal that is already under discussion without a vote by members. The watchdog has only once before used those powers, to approve the merger between the Gainsborough and Yorkshire building societies, which was already under way when the FSA was created.

The members of Cheshire and Derbyshire will not receive any cash distribution as a result of the deal.


http://www.ft.com/cms/s/0/1d66b916-7d82-11dd-bdbd-000077b07658.html?nclick_check=1
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TheCavynautOffline
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PostPosted: 17-09-2008 00:55    Post subject: Reply with quote

So the chickens are finally coming home to roost, and we are finally realising that greed isn't good. It just seems so wrong that it's ordinary people who will have to pay the price.

Hopefully the current fiasco will finally nail the myth that the market is always right, and the state is always wrong.
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rynner
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PostPosted: 17-09-2008 07:29    Post subject: Reply with quote

US government rescues insurer AIG

The US Federal Reserve has announced an $85bn (£48bn) rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy.

AIG will get an $85bn loan, in return for an 80% public stake in the firm.

The rescue follows the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world's financial markets.

Meanwhile, Barclays said it had reached a deal to buy Lehman's US investment banking and capital markets businesses.

The $250m deal, which is subject to approval from the bankruptcy court, will make the British bank the third biggest investment bank in the US.

Barclays will also purchase Lehman's New York headquarters and its two data centres in New Jersey for $1.5bn.

.....

http://news.bbc.co.uk/1/hi/business/7620127.stm

The trouble is with government 'rescues' is that they cost money. And where do governments get this money? Often, from loans from investment banks like Lehman's! (The Labour government in Britain is often criticized for its high level of borrowing.)

So we could descend into a whirling maelstrom of debt, until the world's financial system finally disappears up its own fundament! Shocked

The world's banks have always played a game of robbing Peter to pay Paul - the big problem now is that national governments are getting increasingly sucked in too....

No money for wages, property worthless - the world could revert back to barter, plunder, and warfare before things get better.... Sad

(I do love a good doomsday scenario, me! Cool )
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rynner
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PostPosted: 17-09-2008 07:54    Post subject: Reply with quote

More doom and gloom:

Financial turmoil: AIG and HBOS woes are tip of the Titanic iceberg - commentary
By Ross Clark
Last Updated: 9:23pm BST 16/09/2008

In a year's time, consumers may look back on the past 48 hours as a bit like the first few minutes after the Titanic struck the iceberg, when high-spirited passengers played snowballs unaware of the danger they were in.

The sight of highly-paid bankers being escorted off their premises with boxes full of possessions seems remote from our everyday lives - and for some people may even provoke feelings of satisfaction, a deserved comeuppance after a decade of City greed.

Those who own shares, either directly or through pension funds, will already be less than amused. Others will be rapidly sobered up if they attempt to renew their mortgages over the coming months.

Since July there seems to have been a slight easing in the mortgage market, with several lenders reducing their fixed rates to below 6.5 per cent compared with over 7 per cent in the early summer.

This led to some speculation that the worst of the credit crunch might be over. No one will be saying that now.

Although US investment banks do not offer mortgages directly to British homebuyers they have been important players in the mortgage securitisation market - the process by which a mortgage in Britain can be bundled up with other mortgages and sold to bond investors around the world.

With the collapse of Lehman Brothers huge volumes of mortgage-backed securities will now be dumped on world markets, making it much harder for lenders to offer mortgages at competitive rates.

....

Governor Mervyn King reiterated yesterday that the consumer price index, now standing at 4.7 per cent, more than twice the government's target rate, will carry on rising until into next year.

Demands for interest rates to be slashed are unlikely to be heeded - at least this side of Christmas. There is little good news for savers either. With inflation at 4.7 per cent it is now all but impossible to find a savings account which, after tax, will offer savers a real rate of return.

To compound the misery the Government earlier this year slashed the rates it pays on inflation-linked National Savings certificates - one of the few ways in which savers have managed to preserve their capital over the past 12 months. Although Lehman Brothers and Merrill Lynch were US banks they had significant operations in Britain: Lehman alone employed 4,500 people in London.

The loss of banking jobs will inevitably have a knock-on effect on the rest of the economy, and not just for the army of nannies, dog-walkers, car dealers and tradesmen who service bankers' lifestyles.

A shrinking financial services sector, one of our biggest export industries, will add to downward pressure on the pound, driving up the cost of imports and impacting further on consumer prices.

The one bright development this week has been the effect of the crisis on global oil prices, which have slumped from their peak earlier in the summer.

The falls should be felt at the pumps over the next few days. But it should not be seen as a harbinger of better times: the reason prices are falling is that global demand for oil is predicted to slump as the global economy slows.

Slightly cheaper motoring will come as little relief for motorists who no longer have a job to drive off to.

http://www.telegraph.co.uk/money/main.jhtml?MLC=/money/city_news/markets&xml=/money/2008/09/16/bcntitanic116.xml&CMP=ILC-mostviewedbox
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rynner
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PostPosted: 17-09-2008 08:33    Post subject: Reply with quote

Interesting POV:

Wall Street is a financial Head-Smashed-In, where ego carries the hordes over the precipice
Carl Mortished: World business briefing

Head-Smashed-In is a buffalo jump in Alberta, Canada, a communal kill site where the Plains Indians drove herds of North American bison off the edge of a cliff. Over thousands of years, the Plains tribes developed the skill of goading buffalo towards a precipice. As the animals thundered towards the drop, those in front would try to stop but the sheer weight of the stampeding herd pressing from behind would force the buffalo over the edge.

Unesco has designated the buffalo killing ground a World Heritage Site. It seems odd to venerate a place that played a part in the near-extinction of those glorious animals. It is right to do so, however, because it tells us how the Plains Indians once lived in periods of food abundance, just as the abandoned trading floors at Lehman Brothers tell us how extravagant Americans and Britons lived by the reckless accumulation of debt in the early years of the 21st century.

Wall Street is as worthy of World Heritage Status as the bison boneyard at Head-Smashed-In. America’s financial centre is not yet extinct, but people are calling time on the investment banks. Two have failed – Bear Stearns and Lehman – and a third, Merrill Lynch, has been swallowed up by an old-fashioned lender, Bank of America, which fancied owning a big stockbroker.

In a matter of days, it has become the fashion to say that the investment bank model is dead. These free-standing institutions that combine corporate advice, lending, stock trading, underwriting and wealth management lack the comfort of millions of retail depositors – the advantage of Bank of America.

They must, therefore, borrow from other banks and, when credit markets stall, their elaborate gaming strategies in complex financial instruments become unsustainable. Soon, the oracles predict, the remaining investment banks Morgan Stanley and Goldman Sachs will disappear into the giant maws of dull high street lenders.

The regular supply of cash is a problem for investment banks, but it is not the root of the problem. The ownership of Merrill Lynch by Bank of America won’t insure against a further outbreak of excess. It will simply shift the risk of excess to the shareholders of Bank of America, who may not have bargained for it.

We can see the tensions between retail lending and fancy investment banking at UBS, which let its own tribe of pinstripes loose to play in the mortgage derivative markets, with catastrophic results.

We now know that the sub-prime securitised mortgage market was little more than a giant pyramid selling scheme in which simple transactions, loans to buy homes, were packaged, bundled, sold, refinanced and the credit risk insured by myriad institutions. None of the bankers who grabbed the passing parcels had any means of ascertaining the solvency of the ultimate borrowers, nor any idea of the true value of the bricks and mortar that underpinned the loans.

If we want to know why some bankers behave like bison racing to the cliff-edge, we need to remember where they came from. The guts of an investment bank is the broker-dealer model, the merging of two types of business: brokers – people who act as agents for investors, buying and selling securities on their behalf – and dealers – who act as principal, trading securities for their own account.

Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobber’s pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.

Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Today’s broker-dealers have no skin in the game – they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.

The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchant’s compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.

It’s difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bank’s balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directors’ service agreements – with generous severance terms – and joint and several liability.

Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.

http://business.timesonline.co.uk/tol/business/columnists/article4769532.ece
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wembley8Offline
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PostPosted: 17-09-2008 11:01    Post subject: Reply with quote

Ravenstone wrote:

Lehman, according to one report I heard, was due to the owner awarding himself the massive pay rises the company couldn't support, and refusing to sell the company for a realistic figure, choosing rather to hold out for a figure far higher than the company was worth.


Lehman is quoted on the stock exchange - it doesn't have "an owner."
Shareholders get dividends rather than pay (and they don't set the leve anywayl).

Your source sounds like a simplistic "it's all caused by the greedy bankers" urban myth.
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ted_bloody_maulOffline
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PostPosted: 17-09-2008 12:33    Post subject: Reply with quote

I'd have thought that the amount the CEO paid to himself, although unjustifiable, would be small beer compared to the overall amount of cash transacted in the name of Lehman Bros. I have heard him taking flak for holding out for a higher figure, though.
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rynner
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PostPosted: 17-09-2008 21:08    Post subject: Reply with quote

ted_bloody_maul wrote:
I'd have thought that the amount the CEO paid to himself, although unjustifiable, would be small beer compared to the overall amount of cash transacted in the name of Lehman Bros. I have heard him taking flak for holding out for a higher figure, though.

That's the 'ego' thing again.

The main point is that the bank only had to be sold because of the credit crunch.

But lesser vultures are also about, looking for what pickings they can get:

Merged banks' names cybersquatted

Internet addresses corresponding to recent bank mergers are already being hoarded and sold online.

In "cybersquatting", likely addresses are bought cheaply in the hope of selling to the businesses involved, or as a medium for advertising.

Domain names for the merged Bank of America/Merrill Lynch as well as for Lloyds TSB/HBOS have been snapped up.

In one case, the domain name has already been listed on eBay, with the site directing visitors to the auction.

As reports of Lehman Brothers' intent to sell itself first surfaced last Friday, cybersquatters had already spotted Barclay's, HSBC and Bank of America as potential buyers.

Accordingly, barclayslehman.com, hsbclehman.com, hsbclehmanbrothers.com and bofalehman.com had been acquired.

With the acquisition of Merrill Lynch by Bank of America this week, cybersquatters registered bankofamericamerrilllynch.com and bofaml.com.

In the UK, speculation surrounding the merger of Lloyds TSB with HBOS prompted yet more cybersquatting, so that now lloydstsbhbos.com and hboslloydstsb.com are owned.

"It shows how there are opportunists out there waiting to pounce on any event," says Jonathan Robinson, chief operating officer of NetNames.

"We've seen it in the case of celebrity with David Beckham going to LA Galaxy, we've seen it in the case of tragedy, with Princess Diana's death. There's a subtle twist on the whole thing now, which is the anticipation of the event."

'Click-through value'

Many cybersquatters have pay-per-click ads as revenue generators while awaiting potential buyers.

"Back in the mists of time, these names had a capital value and could be exchanged for cash," says Mr Robinson.

"There's another value they have nowadays and that's a click-through value, a cash flow that they generate in the whole world of online advertising.

"There's even automated software that will populate a website with relevant content."

The speculative HSBC/Lehman site, for example, looks like a news site about the myriad mergers and movements but features Google adverts along the margins.

In the case of bankofamericamerrilllynch.com, the object is more apparent; a visit to the site directs visitors to an eBay auction in which the domain name is for sale.

"The lesson has been there for a while for anyone working in the mergers and acquisitions area that this is a key area to focus on in the due diligence process," Mr Robinson says.

"One can't wait until after the deal is announced or the product is launched."

http://news.bbc.co.uk/1/hi/technology/7621647.stm
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