Monday, September 15, 2008

Financial collapses

Bear Stearns, Lehman Bros, Fannie Mae and Freddie Mac receiving public bailouts or failing and yes even the venerable Merrill Lynch being flogged for a pittance.  And insurer AIG seems to need about $40 billion to survive. AIG is a big insurer in Australia with 500 employees. In the UK Hbos looks threatened by the collapse of Lehman. The bad news has not ended - it is only now starting to surface.

3 of the 5 largest investment banks in the US - some around for 150 years - have been wiped out or sold off at bargain basement prices. The asset values a puff of smoke.

I have been caught up with other things the past few days but watching what is unfolding with trepidation. The events over the past few days are a catastrophe beyond belief. I am interested to see what will happen to Macquarie Bank - their shares fell 11% today but I'll watch them today with interest. Babcock and Brown have fallen 94% this year and almost collapsed completely this year as former CEO departed the company completely.

Australian bank stocks generally will certainly continue to retreat but the broader market will also continue to suffer. We will all experience economic costs.

Update: Wall Street dropped 500 points last night.  Excellent discussions on the crisis by Malcolm Maiden and Michael West.

5 comments:

Spiros said...

It's a good thing that Lehman brothers isn't being rescued. The shareholders lose their equity and the managers get fired. That's the way it is supposed to happen when businesses fail. If it happens in an orderly manner and there isn't a rush to the exists from the other financial institutions, it should be OK.

But as Michael West says, all those local councils who bought those worthless AA and AAA rated pieces of paper from Lehman are going to have no one to sue. You can't blame the councillors. They have investment guidelines that say they can only invest in things that have a certain rating.

They followed the guidelines but it turns out that ratings don't actually mean what they are commonly supposed to mean. No doubt the ratings agencies disclose all of this (in 3 point type, printed in faint ink on page 278 of their reports).

The financial cowboys who created and sold these dud financial products while pocketing millions of dollars for themselves should be held to account for fleecing investors and for endangering the world economy. They should be severely punished. But the ratings agencies were complicit too.

jc said...

Spiros:

Get the fire going as we're going to burn witches tonight LOL

look, no one realized these things were going to blow up. Place the blame where it ought to be placed which is right at the door of the Fed for allowing interest rates to stay too low for too long during most of this decade and allowing these distortions to manifest.

The bankers creating these products are not economists and they aren't able to tell what the future holds. believe me if they thought this stuff was so toxic they wouldn't have sold it, much less warehouse it on their books which just shows your total ignorance on this subject.

Do you actually think these banks that were caught with the same securities their investors held would have warehoused this junk if they thought it was so bad? Do you?

You really need to think a little more rather than allowing your keyboard to do the thinking for you.

Spiros said...

So JC, your defence of the banks is that they had no idea what they were doing.

Well that makes it all right then.

Not.

They had their balance sheets loaded up with tens of billions worth of CDOs whose risks they now admit they never properly understood, and you reckon their ignorance absolves them of responsibility!

And when they created and parcelled up these NINJA loans (No Income, No Job, No Assets) to people who never had a chance of paying them back if house prices stopped going up, you reckon it's not the banks' fault, because they couldn't see the future.

They might as well have gone down to the casino and punted all their shareholders' capital and 10 times as much in borrowed money, on the roulette wheel.

The whole game was pass the ticking time bomb they they created. Everyone knew or should have known that the bomb would go off as soon as house prices stopped going up. They just didn't know exactly when they would happen. So some go caught holding the bomb while others were lucky.

Of course what they understood perfectly well was the hundreds of millions in fees they were taking out along the way.

Francis Xavier Holden said...

There is going to be an explosion of Australian quangos and such that will lose money, but it won't show up until next year.

The current accounting rules for bringing "impairment' of investments allows a wide range of decisions as the whether the impairment is a long term trend or likley to improve. So that it is entirely within the rules to make no impairment write down this year - at June 30 - even though a sell up would result in 10% - 30% or more loss.

Added to that a lot of impairment has happened post June 30.

Millions has been lost by local government cowboys investing in dodgy schemes - of course they will now turn around and blame the sharp salesmen.

Yes the AAA ratings in many cases are a nonsense, but others avoided the complicated structured products. Its not good enough to say "But it had an AAA rating" theres more to financial prudence than ratings.

It was a no brainer, if sensible and conservative, 12 - 18 months ago to shift from Oz shares to cash. Since then oz shares have returned bugger all or a loss and cash has done %5+ and rising and safe.

Infrastructure has been ok but anyone in overseas property products will be up to 30% down.

The real drama of losses for local government and semi government organisations will be when the financial reports reach parliament in October 2009 and most will have been forced to impair their investments.

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