Meltdown Monday

It's been interesting watching this whole episode unfold from the relative (and I use that word cautiously) safety of the Australian financial system. Whilst there has been impact to date, compared to the fallout in the US and UK it has been relatively small beer.

The interesting thing now will be to see how far the ramifications of the failure of a top tier bank rumble through to areas that to date have been fairly unscathed. I think this will be another one of those days that we will reflect back on in the future.

I also spare a thought for all those people that basically have lost their jobs today. There has been a lot of vitriol towards the fat cat bankers and their ill gotten gains, but the reality is that these institutions employ people from all walks of life, most of whom take home a normal salary to pay for the mortgage and all of lifes other expenses, I hope the world treats them a little more kindly and helps them to find alternative employment.

It's becoming the norm to blame these problems, this and the takeover over Fanny Mae etc last weekend, on the difficulties in the US housing market. But the problem is actually foolish lending - lenders should not lend to people who cannot repay. The US subprime problem is a problem created by lenders. And then exacerbated by securitising the loan books, thus contaminating good loans with bad.

The underlying economies are the same as they ever were and it is the bankers who have caused such havoc on the financial markets by their foolish behaviour.

They now need to be brave, and get back to lending to each other, or more will collapse.

Worst in 25 years of reporting, meltdown Monday lets see where Pestons prediction are when wall street closes tonight.

In 1997, we dumb Asians listened in abject humility as the "wise" men of both IMF and the World Bank lectured us what a sound financial system should be like. These guys went so far as to brand Malaysian PM Dr. Mahathir an incompetent Finance Minister who practised voodoo economics.

So how now? Any wise advices for the incompetent US Fed Governor and Secretary of the Treasury. Looks like the USA government will be in the public housing business soon as it takes over all the outstanding mortgages.

"tied" them over? Tut tut Robert. Back to spelling class I think.

The moment that a group of bankers put together a 'collaborative' fund of $70bn is the same moment that someone else will decide to speculate against them. The fund won't fix any fundamental problems with the system so it won't be enough to halt the revaluation of everything in the system. This is a Canute-ish move!

If I remember correctly from reading Galbraith's 'Great Crash' similar moves were made at that time but it will fail again, this time, because the dogs of Wall St don't know the meaning of the word co-operation.

Obviously we should feel sorry for the little people - those clerks and receptionists who did not share in the massive bonuses earned by their superiors.

But I have not one shred of pity for those at the top. Even if they lose their jobs most would have salted away a large part of their gains, even if their share options have become worthless.

People don't seem to realise how serious this is. I am fully expecting a complete meltdown of the world's financial systems this week.

I imagine that this blog will be one place where this ongoing unravelling of the global finance system isn't a complete surprise.

Unlike various official commentators who have repeatedly called the "bottom" of the crunch, the market, the downturn or whatever aspect they are talking about.

It will be interesting to see if the commentators proposing October to be the bottom of the Equity market ( quite a few newspapers had this identical line over the weekend) and end 2009 being the nadir of the property market are correct in their predictions

#4, sizzlestick, if you happen to have any old
books on "voodoo economics" lying around,
could you please post them on the web?

Our incoming administration might need to
come up to speed in a hurry.

Despite having an enourmous amount of sympathy for the "normal" staff of these troubled banks I never the less feel that the companies are getting what they deserve afetr years of fleecing the public and world in general. Although in the main their dealings have not been aimed at the man in the street the effect on this man has been clearly seen by the despicable and greedy actions of the bank and individual "bankers".
They are getting what they deserve and frankly I have little sympathy for the immoral banks and banking system!!

Hopefully Banking will go back to basics.

If they have common sense they will desist from creating exotic Bonds built on complex mathematical models.

Banks should just raise money through Deposits, Shares, and Bonds secured just on the Bank and then lend out the money themselves with no middlemen.

It would be worth closing the ratings agencies perhaps creating one National or International ratings agency perhaps connected to an insurance fund to guarantee any securities they have 'judged' sound.

It would be wise to curtail Stock Lending, so agents cannot profiteer from lending their clients Shares.

The markets have been predicting for months a major US bank failure, now we have it.

So if stockmarkets have been pricing this in then, yes, after some volatility maybe this will be a corner turned.

Whilst there will be short-term and serious turmoil from the bankruptcy of Lehman Brothers and the capitulation of Merrill Lynch, perhaps this is the beginning of the end.

The two most remarkable features of the investment banking business have been:

1) Lack of accountability to shareholders and the grossly disproportionate share of profits paid to employees rather than to those who have provided capital;

2) The risks employees were willing to take with the money of others for their own gain.

It is this lack of accountability and interest in the long-term value and viability which encouraged poor risk management, the results of which we are seeing today.

Potential investors have looked at Lehman and walked away from the unattractive proposition, and , more than any other group, it will be the employees who will suffer. On a personal basis this is sad but overall it is a good thing. The pool of unemployed bankers and the redundancy fears of those who remain at surviving institutions will allow the restructuring of these businesses and their remuneration schemes so that they are run in the long-term interest of their owners rather than the short-term interest of employees.

The Telegraph (according to Today -BBC Radio4) says that the problem was created by too low interest rates - something I have been banging on about fro a decade to the BoE - (although I am an outsider and thus totality insignificant in global banking!)

I also thought it was a bit rich of Alan Greenspan coming on the Radio 4 (same programme) and saying it is a once in 50 years or once in 100 years problem.

It is impossible not to put these two 'facts' (opinions as ignorant as mine!) and conclude that Alan Greenspan's policy of low interest rates was the cause of the problem that we have today. I fail to understand why he (Alan Greenspan) did not understand this at the time and cannot see that he is responsible now. (He was after all the chief global architect of low interest rates.)

The quite obvious and inescapable answer is to have higher interest rates as a long term policy.

I have no solution to the present problem other than to let the market crash if that is what it wants to do, as any kind of intervention is both financially impossible to fund and a pointless waste of public money that will be better spent funding soup lines.

Come on Robert, "In a way it's fortunate that most Asian markets have been shut today."

This plus the Republic Convention is safely out of the way, then Paulson decides to play "Hardball". Come on boy, even you don't believe this is down to the "law of coincidences"!!!

I think the world should be pleased about this and hopefully many more to banks and financial institutions will follow. It proves the old maxim: 'property is theft'. Hopefully we can all realise finally that allowing credit is very bad generally and it ruins rather than improves lives. We should all now move away from excessive hours of work as slaves to the materialistic world; learn to have much less in the material sense and gain much more in our social lives; so much work is good but much beyond 30 hours a week is bad and should be outlawed in the world especially the EU; then we could not afford the credit which is obviouly so bad for everyone as we are yet to learn; pay for what you need and the rest does not matter; people are more important than things which the Western World has become addicted to. Long live the revolution!

Robert,

Lehmans used marks of mid to high to thirty cents in the dollar for its sub-prime and A2A exposure last week. Merrills sold CDOs at 22 cents in the dollar. The market seems to be saying these prices are realistic.

AIG and some others seem to be more hopeful (less realistic). If you value the portfolios of AIG and other walking wounded at these rates what does it do to their capital needs? I'm not surprised that AIG are alleged to have asked for a $40 bill emergency facility from the Fed.

WSJ.com has a posting which is sobering: https://online.wsj.com/article/SB122144512332634941.html

I'm not clear who actually loses when Lehman goes bust. Is it the funds of wealthy investors that disappear, or US tax payers money if the US giovernment guarantees investors, as ours does? Please explain

roger luther

spelling ...

it not "tied them over"

it's "tide them over"

"The value of your shares can go DOWN as well as up" ... looks like we will be testing the "Down" option in the next few days.

#2 has hit the nail on the head ... a bonus that motivates folks to sell regardless of the fact that those they sell to cannot pay is a road that leads us into this financial hell ... the day of judgement is upon us.

can someone please explain what this section 11 is about? what will happen to the employees in the meantime - will they get paid?

The big shake out in the worlds financial markets and banking systems that many people prophesised would happen, now appears to be a step nearer.

In that case we could see a number of big banks both here and elsewhere go belly up.

If that happens it will be a real test of the central bankers mettle and the central banks reserves.

The effects could be quite sobering for all of us and in some cases quite brutal.

How much will the value of the Dollar fall by ?

Are we talking three, four or five Dollars to the Pound ?

So the brown sticky stuff has finally hit the fan and is about to be redistributed far and wide.

I asked the question as to when will this end last Friday. There is no doubt that the begining of the credit crunch has now ended and we are about to start the meat course. Rare or well-done is immaterial.

What will be left standing by the time we get to the hard cheese is in the lap of the gods.

The ramificiations are going to be quite fundamental to our society, how we see ourselves and how we behave in the future.

All we can do now is to keep an open mind and try not to panic.

#5 - pedantry won't solve the credit crunch.

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that's an exciting start for a Monday.

Of course, this will take time and a lot of our money to clean up.

But on the other hand, there's nothing worse for markets than a drawn out saga, so it is good that Lehman's is out of the frame. Now that it is history, we can draw a line under it and move on. It’s been a drag for long enough.

Another pleasing aspect is that the shareholders presiding over this debacle have lost all. Merv must be pleased - investors will be less eager to pour money into lousy ideas in future.

Mr Peston: "to tied them over." - You mean, "tide them over".

Your reporting remains a sane window into this unbalanced world.

i have long believed that a large part of this problem has been the media feeding frenzy "The only news worth reporting is bad news"- which in this country has been led to a degree by Mr Peston who appears to be trying to "make a name" for himself. Had anybody heard of him prior to Northern Rock?

For somebody who thinks he leads the world in predicting who is going down next, led by his grandiose claim this morning "As i predicted yesterday" - its worth looking at what Mr Peston predicted last wednesday Sept 10th and i quote

"But, for the avoidance of doubt, this firm is not bust nor seems in imminent danger of collapse".

Oh dear Mr Peston - perhaps your degree in hindsight is not a first class one after all!

'Meltdown Monday' - thats funny I just heard a 'Today Programme' interview from barclays HQ AFTER the stockmarket opened and the guy was adamant that there was no way it was a Meldtown.

Yes the stock market has opened 150 points down - but then over the last 12 motnhs thats not unusual.

I think on balance, due to the continued doom of your reports for 12 months; I shall give the benefit of the doubt to the chap from Barclays who was - as a banker, (as opposed to a Jouralist) able to put a bigger picture.

Interestingly one of your doom reports claimed (and I dissagreed with you on here) mortgages will not come down in price; every onth sicne you made that claim - they have done. Even last week they came down again.

You certainly predicted this event 24 hours before it happened but, you know, Lehman's demise didn't happen yesterday, it has been happening over the last few years, with the explosion of derivative debt and the sheer criminal behaviour of too many people, aided and abetted by an incompetent and corrupt US administration. The alarm bells should have been ringing at least five years ago, but as long as everything seemed to be skating along nicely, no-one noticed that, just as in the Arctic, the ice was becoming dangerously thin. There were some old fashioned and much derided economists sounding the warning signals, just like the climate scientists, but I'm afraid far too many people were too busy enjoying the good times. Too late now. We should have dealt with all this long ago, and to be honest I'm not that impressed with a 24 hour warning. However, to be fair, I haven't read this blog previously, perhaps you were predicting this collapse some time ago, but if you were, then the vast majority of your colleagues weren't.

So Peston has ben in the business 25 years so should know better if he really knows the market.

There are trillions yes trillions of dollars just waiting on the sidelines to move into the market.

This is wht they have all been waiting for and wanting, capitualtion / contagion now they have it the market will take off and the bulls will run.

Some basics
We do not grow an economy by increasing spending with money borrowed that we cannot pay back or by doing each other's washing
Bankers do not add value by lending each other money or overlending to customers and should not get bonuses until the bank gets its money back and so has earned its profit
A risk can be shared but the initial risk premium is the maximum amount of money that can be shared by the risk takers
Value is created fundamentally by making things- our young people should be inspired to become engineers and scientists not investment bankers-lets get a pay structure that does this.
The current mess is a golden opportunity recallibrate and put the world on a sensible and sustainable footing- but that means we will all have to change some of our behaviour- sadly there will be a lot of pain before we get there- and we may just come through without the pain and return to being ostraches

This is the old adage buy when eberyone is selling so buy buy buy now when the market id down.
Meltdown Monday Peston Bradford and Bingly who are a bank shares are up today and have risen 10% in the last 30 minutes.

The "wisdom" of the likes of Ronnie Reagan, George Bush sr,, and George Bush junior, is coming home to roost. Even as the election for president of the United States goes on, the die hard republican right in the US champions less taxes on the wealthiest americans, and less regulation of corporations. It wouldn't take much of a leap of faith to assume that these idiots intent is to see this wonderful country collapse. The C.E.O.s of these failed institutions will undoubtedly walk away with tens of millions more of taxpayers money as compensation for a job destructively done. I guess this is proof that corporations need no rules? Are these bailouts evidence of "small government"? The irresponsible "children" who have been running these banks should be locked up for life for they have proved a threat to all our lives.

Correction.
Bradford and Bingley are up 20% from their low at the open.
Peston.
Understand investors have been waiting over a year for a day like today.

To averywiseman on post 2

"the underlying economies are the same as they ever were"

possibly right but how good were they in the first place.

Also this boom created by the idiot bankers created much vastly higher tax receipts for Gordon Brown.

And what did he do with them?

He spent them all hugely increasing the public sector without giving a damn as to how well spent the money was.

An intelligent man would have recognised that this boom wouldn't go on forever and would save money for when the inevitable downturn came.

In fact stupefyingly more was borrowed (not saved) to commit to even more public spending on the basis that we would be able to pay it back out of our ever increasing tax receipts, which was down to the fact that bust had been eradicated. Yeah right!

Now consider the fact that on AD projections of over 2% growth in the economy we are going to breach our borrowing limit.

What are the consequences going to be to our tax and spend when tax receipts fall.

People are now spending more of their money on Gas and food.

There is only 5% VAT on gas and 0% VAT on Food. Government receipts go down.

Unemployment is increasing therefore less income tax being paid at the same time as job seekers allowance is increasing.

Less stamp duty receipts

The list could go on nearly forever.

The penny has now dropped with the government as shown by their treatment of the police over their pay rise and the request for only 2% pay rises for public sector employees.

What happens to individuals and companies when they have less money coming in than going out?

"Render unto Lehman the things which are Lehmans."

Unfortunately hearing the news of the failure of Lehman was not a surprise and the "rescue" of ML by the Fed might be akin to a drop in the ocean-how many more banks can be rescued?

I only hope that we do not see a domino effect in the coming weeks and months where more banks are forced into the same position and the security of deposits jeapordised.

While it is fashionable in some circles to gloat at the situations the "Fat Cats" now find themselves in, it is worth bearing in mind that the happenings in financial markets ultimately affect us all in one form or another-should that be in lower values for our pension funds or ISAs or in the higher rates we pay for our mortgages.

Irresponsible behaviour and no doubt greed may have got the markets into this situation but only prudence and a perhaps few years of pain may get us out the other side. There may be no option but to sit this one out and this "correction" - albeit very painful-will probably result in a healthier financial market and better practice in the long run.

There is a vast amount of money flowing around the world, just because a private investment bank like Lehmans has gone does not really amount to a hill of beans.
This is just another opportunity for the "players" on the inside to make a lot of money for themselves whilst using other peoples money. Tails they win heads you lose. In the real world of small business devoid of million pound "contractual payouts"(see recent BS takeovers) the banks have always been happy to lend you ten quid as long as you secure their ten quid with fifty quids worth of assets. Nothing has changed apart from the fact that the banking "stars" have been shown to be overpaid con artists, something small business people have known for years.

Nobody said "property is theft". What they said was "Capital is the accumulation of previously expropriated surplus wage labour". The recent banking events have nothing to do with Mr. Marx's analysis, which was about manufacturing and craftsmen, not banks. What banks aim to do is to fleece ordinary customers (e.g. read the UK's FSA report on HSBC - charging 30% interest and mis-selling Repayment Insurance), and then speculate with that money. Speculation is risky. Not all risks pay off.

It is not just bad lending it is also criminal fraud in borrowing both parties should be taken before the courts.
The resulting jail sentences will result in so many new prisons needing to be built it will rejuvenate the building industry in the USA.
The were quick enough to jail Lord Black, lets see some of these American fraudsters in jail as well, both bankers and other fraudsters.

It is pretty obvious that the Fed do not expect Lehman to be the last to enter the casualty zone. If Lehmans was seen as the last act in the play it would have been propped up and the curtains hurriedly drawn.

If so the problem is what is going to unravel over the next few months. It would be nice to think there was a prospect that a US ecomonic recovery would occur in 2010 but the impact of this lot could take a lot longer to unpick.

I doubt they will have done the books on Lehmans by 2010.

The chickens are coming home to roost but the chickens are the size of King Kong.

"tied them" - typo or psycho slip?

Pam,London

Does anyone else think that this problem with the US sub prime mortgage market had it's roots in the stimuli applied to the financial system by the US government in the wake of 9/11.

The US Government urged people to go out and spend money to prevent a recession and reduced the interest rates to fuel the economy. The US mortgage brokers signed up people for mortgages that never had a chance of repaying the loan when eventually interest rates went up.

There is no way out of this in the short or medium term.

A quote from the film "Good Morning Vietnam" which tells the story of another American disaster

"It's all one big sh.t sandwich, and we've all got to take a bite"

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Mammon has a terrible bite and an insatiable appetite!

Reading all these posting is interesting. All these very experienced bankers, the real problem in banking is not the system but the people behind the system. 95% of employees in banking have never ever been properly trained, I have spent now 27 years in banking passed all able qualifications and still do not understand all. However when one walks into a Trading Room and finds that the traders, who earn top £ / $, do not even understand what they are trading, how do you expect that someone from the Administration understands what they are processing?

The regulators have made two mistakes cheap money and products, which even the creators of the product do not understand.

Just to the comments from Asia I lost my job due to the failing of the Asian market in 1989 Christmas, the system was blown up, nobody know what was going on (knowledge) and cheap money (National Banks); but an additional factor was the systems between the banks did not stack up, therefore the crash came not because only of "cheap" money but due to the lack of preocessing, information and last knowledge of staff.

All these happened because of very low interest rate and as interest rate was increased later.

To stabiles the market we have to cut rates fast and pump money into the market, remember Japan in the nineties, as things are going we are heading towards 0% interest rate.

Hopefully lessons are learnt and the central banks around the world does not mess the world again by having unrealistic rates too low as it had once and too high as it is having now.

Second round impact will be number of business filing bankruptcy as they cannot afford to repay the loans or get loans.

To be honest, as far as I can see, so much of this crisis has been engineered by ridiculous financial reporting standards which require banks to mark their assets every quarter.

All it takes is one piece of bad news, which causes one bank to mark an asset class lower, which in turn more-or-less requires others to do likewise, followed by the marking-down of other assets linked or contaminated, and so the world collapses.

If you or I buy a long-term asset, we wouldn't dump it because it wasn't now worth what we'd paid for it - we'd hold it. The only loss that matters is the one on the day we're forced to sell.

When the markets recover (as they inevitably will, given time) those left standing will be declaring unheard-of profits, whilst so many others will have lost everything, all in the name of transparency.

It isn't so much the end of the system, as - I hope - the end of short-term, stock market-led quarterly reporting, which does nothing but breed volatility and risk for all concerned.

As I expected, Lehman's has been allowed to go to the wall (quite right too). The world has not collapsed - its just a bit more volatile and uncomfortable.

There are those who say very large financial institutions usually have the resources to get themselves out of a mess while smaller fry collapse and that large organisations affect the global arena, thus some organisations are too large to be allowed to fail. This is rubbish, based usually on self-interest (they have shares in the company concerned). In fact if a company is so large that it affects the global market seriously, then it suggests that a regulatory cap should be placed on the size of companies across the globe such that no company is believed to be immune from failure.

As an aside, all executive bonuses should be paid several years in arrears when a true reflection of their contribution to the success or otherwise can be ascertained (and reduced or eliminated for poor performance). Many CEO's and senior executives stay a few years then jump ship with their large bonuses before the s**t hits the fan at present, leaving shareholders and employees to suffer.

I am really worried about the Bank of America / Merrill Lynch deal. It doesnt feel right at all, why would they pay so much for a company that they could buy for a snip? Something doesnt seem right here, and that really worries me.

If a strong bank buys a weak bank, the transaction makes strong bank weaker. If the weak bank is really really weak, it is possible that it can bring the big bank to its knees as well. Just how much of a black hole is there at Merrill Lynch? Where is Bank of America getting the cash from the buy this lame duck?

You would have thought potential lenders to Bank of America would have been a bit wary after they were dumb enough to buy Countrywide. Perhaps they are doing this to create the illusion that they are strong as well.

I doubt that they are, and I wouldnt be surprised at all if they were to hit the headlines in the near future as they too succumb.

Wow what an inflated price B of A have paid for Merrills. Will it be enough to settle the nerves I wonder? You have to feel sorry, yes sorry, for Lehmans. They did not have enough luck or enough friends. Watch out for the next one - won't be long sadly.

When this blows over, as it surely will, what is to prevent the same banking wide boys setting up similar fragile systems?
When will society in general wake up to the fact that the mystery in financial affairs is largely to do with keeping the suppliers of the money (you and I) dark about those making the money (the so called fat cats). There is litle in banking to justify the enormous salaries and bonuses paid out annually, and, as above, we all know where the money really comes from.

All sorts of institutions and individuals will be reacting this week, and not in any coordinated way, although some will communicate with one another. So how it will play out overall is quite unpredictable; this is not a situation that any of our financial models is set up for. Seems to me that this is a moment for most of us, including financial commentators, to apply a rule I learned many years ago in wartime uproars with everyone shooting in the darkness: keep down and stay put until either the craziness subsides or you can figure out which way to go.

Seems that 'Capitalism Isn't Working'. At least, the Anglo/American model. I would like to ask how our neighbours, the French, despite not having the vast oil revenues we have had over the last 15 years, are not heading into recession. Why we are 'begging' them to build our new power stations. Why they not enduring vast utility bill increases? Not long ago politicians used to mock the French and their 'faulty' version of capitalism. Who's laughing now? Privatisation of anything tht moves didn't work. Time to look to the French model, not the failed American one.

The article linked below, entitled "Lehman Brothers in $8.7 billion bonus payout", is from December 2006. How fiscally irresponsible can you get, doling out obscene bonuses when the company's financial positions were as exposed as they turned out to be?

https://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article754348.ece

I always found the bonus amounts paid to a bunch of milk toast 30 somethings at investment banks utterly insulting to the rest of us who have proper jobs and make things or help people. I guess the chickens have come home to roost.

welshrams, before you grab for what may be
a falling knife, I suggest that you check out what
Noriel Roubini has been saying, as in this video.

This is what happens, when the "tail wags the dog"like it has in America for 40 years!!!
Honesty and intelligence were put aside for
"politics".

Regarding Chapter 11, I used to work for a firm that went into Chapter 11. The staff were all made redundant, and various "advisers" and "consultants" have continued to earn fees for the last thirty years trying to sort it all out.

leicestersq, rcrobjohn, is this $50B that BOA
paid "real money?" I don't believe it. I'll bet they
swapped some junk bonds for the deal.

The essential truth is that America has been living on borrowed time and money, beyond its means, for decades. Now many families have two or even three jobs just to keep up with the repayments. Many have sustained the lifestyle by putting the credit card bill on the mortgage, which is well providing the house value continues to rise. But now they are tired. They can't make it any more. The rich got richer and the poor are exhausted.

The sub-prime strategy delayed the inevitable with one last crazy twist and the financiers got too clever for their own good, gambling on financial products that top management just didn't understand most of the time.

And so the house of cards got higher and higher. Sooner or later the bill was going to come in. And it has. Someone took one of the cards out from the house of cards.

By the way, this is not to say that the Brits have the moral high ground. Far from it. We have quietly been doing the same in our own little way. And as the quake spreads from America to here, I'm afraid many of our houses are going to fall down. And when houses are back down to being worth three times salary, how many will be left in positive equity, do we think?

Oh, what a tangled web we weaved.

This is all utterly predictable and has been for the last five years or so.

The development of the Chinese (predominantly) economy, has led to massive price deflation of key (consumer) products, which in turn has kept inflation at bay. Egged on by (greedy) bankers spotting a 'once in a lifetime' golden opportunity, the central banks have kept interest rates stupidly low, because they have been able to get away with it.

We then have a bank induced speculative bubble into which most people have been sucked (good or bad credit risks). The banks have lent like fools, the bad risks have defaulted (American sub prime predominantly so far) and the system has come apart at the seams.

It doesn't take a Nobel Laureate to have predicted this. I thought this was what independent central banks were supposed to predict (model) and then plan for, before the problem could become too large.

What's galling is that most of these bankers have made billions off the back of this stupidity (and have (again) been lauded as 'Masters of the Universe'). Most of them will not personally suffer for their folly. Millions of home owners (that were daft enough to believe them) will. And everyone else is left to pick up the pieces.

Where America goes we will surely always follow. UK property development loans, buyto let, personal mortgages - take your pick for the seam that's going to come apart first in the UK.

Let's hope that this time banks can take a step back and begin to remember what their real role in the economy is (prudent allocation of capital to where it can be best utillised and is most needed to serve society).

.............and of course (so called) developing nations have to take advice from the very people that have presided over this fiasco.

I'm sure letting Lehman go bust was the right idea and have been saying so for some days.

I note Merill Lynch has been taken over by Bank of America at a 70% premium over the share price on Friday. Is this a good deal for Bank of America, paying substantially the over the odds to acquire more dodgy assets? How are they funding this??? Doesn't this weaken Bank of America?

And how long before is it back to $2 to the £?

Repsondong to leicestersq (post 53) BoA did not raise cash to acquire Merrils. The BofA said it would exchange 0.8595 shares of its common stock for each Merrill common share in a $50bn all-stock transaction. Based on Friday’s closing prices, the offer is the equivalent of $29 per share and 1.8 times Merrill’s stated tangible book value.

#50

Spot on with the comment about the increase in businesses filing for bankruptcy as a result!

It is not just the cost of the loans they already have increasing which will cause this.

Following recent events banks will now be even more cautious about lending to each other. In order to maintain their own balance sheets and maintain a meagre level of lending (to keep the machinery oiled), they will need to call in loans to many smaller businesses, who, in the new financial landscape are reassessed as a potential risk.

This will lead to additional unemployment which will further drain the governments already threadbare purse. This in turn will lead to redundancies in the public sector.

The fallout from the current situation will be a vicious circle of decreasing credit to consumers and small business and decreasing public expenditure.

Which, considering the ridiculous increase in public service workers in recent years might not be a bad thing!

I think we are now re-learning the lesson our Great Grand Parents could have told us... that Financial markets CANNOT regulate themselves- and that while yes regulation, and strict regulation at that, DOES limit the possible gains that can be made... it also prevents mistakes like the ones we see now. Which are similar to the ones made by our Great Grand Parents in the 1920's.

De-Regulation of the US Banking system however is not the fault of Bush or Reagan. It was a certain President Clinton who really de-regulated the US financial markets, hence why at first his term in office is seen as such a high water mark for the US economy (not forgetting the dot com bubble).
Lest we forget that the MOST conservative and de-regulatorial government in recent UK history has been the current Labour one- it is in the policies of Gordan Brown that we see Britain becoming such a great place to make money in... but also a place open to great risks.
Like our Great Grand Parents we will soon have to see how deep the recession goes. Luckily for us, we have the economies of the Middle East and Asia to support us and help us.
And maybe we will continue to believe that Bankers can regulate themselves. But that is impossible. Remember- it is the LEGAL duty for every company who has shareholders to generate as much profit as they can for the shareholders. It is illegal for them to do otherwise. Unless we set up clear and STRICT limits onto what they can and cannot do, globally, they will always cut corners, make the risky deal and every so often, pay the high price.

This comment was removed because the moderators found it broke the house rules. Explain.

I have just learned two things.

Firstly, my earlier offering has been modded.

Secondly, one of our largest competitors was financed by Lehman.

However, I am not going to break out the bubbly for the simple reason, as my earlier offering implied, that no matter who you are and who is financing your business, we are all now very vulnerable.

It is a great pity that there are those in the BBC who do not appreciate colourful descriptions, however appropriate. In future I will turn off Mock the Week.

i thought the stock market was always ahead of the curve, therefore as even my grandmother knew lehman was a dead duck today's falls must be factoring in the next "shock". The fat lady has obviously not started singing yet!

46. At 09:43am on 15 Sep 2008, Ikantbelieveit wrote:

Does anyone else think that this problem with the US sub prime mortgage market had it's roots in the stimuli applied to the financial system by the US government in the wake of 9/11.

The US Government urged people to go out and spend money to prevent a recession and reduced the interest rates to fuel the economy

I agree totally. I wrote as much on Nick Robinson's blog yesterday.

Yep. Pre 9/11 the US economy was still a bit ropey after the dot.com bust. Post 9/11, the US was desperate not to hand a further publicity coup to them pesky Islamists by allowing a US recession to take hold in an already vulnerable environment.

So the US cut interest rates and flooded their economy with borrowed money. Ha! Osama Bin Laden - you may murder our citizens but you won't bring down our economy. Riiiiiiiiight.

Over here, this was suddenly the perfect excuse for our own squanderer-in-chief to start hosing the cash around. Any time I attempted to highlight the insanit at the time (from 2003 onwards) I was knocked back by grinning apparatchiks giving it 'We're not borrowing as much as the Americans'. I don't care if the US destroy their economy. I don't live there.

And so it has come to pass. The US look to have destroyed their economy but Gordon Brown seems to have destroyed ours. They'll seek to blame it as an 'imported problem'. All America's fault. But it simply isn't true. If our government had kept to sensible (prudent?) levels of tax and spending then we wouldn't have triggered our own consumer boom off the back of one million newly employed, newly flush, well-paid public sector employees.

Nope. We'd have just sensibly pootled along, our house prices would have remained sane thanks to regular reminders from our prudent chancellor and press about what happened the last time we got carried away with the faux wealth of increasing house prices. That didn't happen because everybody with an IQ higher than plankton knew full-well what was driving our 'miracle economy' and it suited this government to keep the illusion going and the press.... well they are predominently liberal arts plankton too so if somebody with a maths GCSE tells them 'The economy is great - here print this latest communique from number 10' then off they go.

This country has been let down by the government and the media. This great confidence trick could not have lasted beyond 2003 if anybody in power or the media (particularly the BBC) had spoken up.

The banks will get what they deserve. The over-debted, over-borrowed Bev and Kev Plankton will get what they deserve, the politicians will (eventually) get what they deserve but I'm betting Evan Davies, Mr Peston and the entire BBC economics team will still be employed until they decide to retire.

Where were you guys in 2003? Indeed, when it is so obvious who has been at fault all along - where are you today? Reporting that Lehmann is bankrupt is hardly tough. Where are y'all with highlighting the underlying causes of this financial catastrophe with specific reference to this governments culpability?

The fed needed to let at least one major institution go bust as a deterrent to bad practice in the future.

Every time I see or hear Robert (who may be a good economist, but is the poorest broadcaster I can remember in such an important role), he goes on about 'In all my 25 years as a journalist', 'Never in my whole career' etc

We've got the point, Robert, these are unusual times...

Of course what we are really talking about here is massive global corporate-sanctioned fraud and debt-laundering, aided and abetted by the utter impotence of the regulatory bodies. But as usual the suits in charge have had their noses deep in the trough over the years and it's the workers and home-owners that will pay the price. Governments should be able to raid the homes of these corporate fraudsters and seize back their ill-gotten bonus payments to help the plight of their victims.

I am baffeled to hear the amounts of dollars that are thrown around here: $70 bilion dollars here, 45$ bilion there.... where is all this "money" and who owns it... very confusing all this...

I predict that Warren Buffet will become even richer as money pours into Berkshire Hathaway. Why? Because Buffet only invests in what he understands. He keeps it simple and manageable.

One of the problems with the "investment" banks like Lehman Brothers is that they weave a web of increasingly complex financial instruments so that ultimately no one really knows what they are actually investing in. They may appear to make money for a while (and generate big bonuses for their traders), but they are ultimately flawed. The CDOs were an example of this.

The trouble is that while they appear to make money, no one wants to ask any questions. What we need is simpler banking where the banks lend directly to whoever will actually use the money so that they can properly assess the risks. So that depositors can assess risk, the regulators should force banks to disclose how much they have lent directly to "end users" and how much they have lent to which investment banks. Investors can then have an indication of how well their bank has a handle on the risk.

Some may say that derivatives and collateralized bonds came about to fulfil a market need. However, I would be more sceptical and say they came about as a way of making money appear on paper to get bonuses because I believe that these bankers are more motivated by big bonuses than altruism.

It is now time they faced the music. Rather than propping up these flawed investment banks, the governments should be encouraging sound banking via the regulators forcing banks to disclose where their lending lies so we can see how well they are managing risk.

i don't claim to be a guru when it comes to global economics, but I would have to say that George W Bush is to blame for our current global instability. His knee jerk reactions to 9/11 and subsequent destabilisation of the middle east has only exacerbated the faulty accounting practices and poor lending policies in the US.

#34, #35, #49 and CEO or Deutshe Bank:

I COMPLETELY agree with you. Especially #34: "Value is created fundamentally by making things- our young people should be inspired to become engineers and scientists not investment bankers-lets get a pay structure that does this."

I do Applied Physics (although I am trained as an Engineer) I have seen SO many of my classmates who went to top institutions in India and around the world to study Engineering and then moved to become INVESTMENT BANKERS! They were all very smart, articulate, and fundamentally GOOD engineers, and NONE of them had ANY qualifications to make them bankers. But the pay differences were HUGE.

Even now they are STILL ENOURMOUS! This also lead to hyper-inflated egos, a sense of "bravado" and a needless risk-taking nature that even spilled on to their private lives. The responsibility of the current crisis lies equally with these intelligent, brilliant, and over-paid individuals as the people and institutions that were supposed to control / monitor them.

The pay packets NEED to be rationalized, the bankers MUST be trained properly, perhaps a qualifying exam (like they do for CPAs for example). GOSH - even LAWYERS have to take a bar exam before they practice, and these traders have NO qualifications for their jobs, no "quality assurance" that comes with them, how is this rational? How do people trust such banks who employ such people with their money? I find is SO strange, it is almost surreal.

Do any Investment Bankers even read this? I wonder what they think. Do they think their pay packets are rational? Clearly some, eg #49 - princeSnowknight, don't.

Yay ! How marvellous it is to watch those pigeons coming home to roost, thus proving yet again the old adage that 'what goes around, comes around'.

The most pleasing aspect of all this is knowing that the multi-squillion dollar 'share incentive plans' are now worthless.

Maybe instead of looking to the taxpayer for the next round of bailouts they could start re-possessing the yachts, Porsches and raft of investment property portfolios held by the over paid munchkins who got us into this mess.

And because this is the 'gift that keeps on giving' we can look forward to more hedge funds going bust, and toasting the fingers of those who got a bit too greedy.

This is the day the planet fights back against those who ignore environmental factors when making business investment decisions, and bang on about 'externalities' because they couldn't give a monkey's about environmental sustainability.

A tough lesson, but learn it they must...

sizzlestick - I vote your submission should be the BBC 'post of the day' !

Wonderful stuff - I heartily recommend you to read 'Globalisation and its discontents' by Joseph Stiglitz to get the 'inside view'.

Business reasons aside - the amount of money wasted on trivia at Lehman was shocking (obviously LB are not alone in this). On one hand they'd pay lip service to the environment; on the other, the MDs, CEOs etc still travelled everywhere by limo and took first class flights the way the everage person takes the tube. £5,000 expenses for a CEO for ONE night was not uncommon. In the area I worked in there were far more VPs than the structure warranted, each with their own office and the associated costs incurred. Heavily subsidized restaurant (as if anyone in Canary Wharf is underpaid and needs that)... I could go on but I won't - I just think it makes good business sense, as well as environmental, for investment banks to cut down on the ridiculous excesses that have become the norm.

What a shame that this comment will not be read, because I am too late to reach the top of the list.
However....
Can no one see that the system is to blame. Not just that some are paid huge amounts of money to generate schemes that at first seem to be cash generators, but in reality is merely calling something by another name.. in the sub-prime debacle it was non-repayable dabt being called a CDO. And in the wholesale market it is lending to a bank money that another bank has received by way of deposits, but because of banking ratios, the banks are lending money that they do not actually have. When I went to school, in economics this was called 'flying a kite' now it is called banking.

In response to dicktownsend (#42), it was Pierre Joseph Proudhon - one of the founding thinkers of anarchism - who wrote "property is theft" ("le propriété, c'est le vol") in his 1840 book, "What is property". Although Proudhon influenced Marx (and was later attacked by him), this idea is nothing recognisably to do with Marxism.

(The slogan prompted the following philosophical joke - Q: Why do anarchists drink herbal tea? A: Because all proper tea is theft).

The beginning of the end is how one person put it. Well! It depends on how you see the end. It is certainly the beginning but what sort of end we are likely to see is a complete unknown.
When talking of trillions of dollars of phantom assets taken out of the financial system it will be many years before anyone can put a true value on anything.
So in the meantime property will be virtually impossible to value or sell. Cash is king.
Banks will be so desperate to build up liquidity only those with gold rated credit ratings will be able to borrow and only at a high rate.
The social implications across the whole spectrum are unthinkable. We're back to reality.

So that's it then, another one bites the dust. Won't be the last but might prove to be the biggest. The bankers won't like it but they need tougher regulation to help them get a little twitchy before they act fast and loose with other peoples' money in the future.

If you can't put down a third of the price, be it on a car, house, furniture, operation, whatever, you can't afford it. If the western economies do recognise this fact and make it law this cycle will continue again and again as bankers, like everybody else, will always look at profit today and let tommorrow be damned. This is big news now but people will forget quickly and chase the filfy lucre in the same way in the future. Incidently, love the comment about voodoo economics. I hope Dr. Mahathir feels suitably smug.

It's very anal to make a posting about a spelling error. Please get over it all you who have commented.

I am a little surprised at the continual description in the news media of Lehmans as a150 year old bank. In fact the original Lehman Bros was in trouble in 1984 and was then taken into American Express. Part of their operation re-emerged in 1991 as an independent under CEO Richard Fuld and grew rapidly (perhaps too rapidly) by clever(?) financial resource management. They almost came a cropper in the late 90's Russian financial collapse but continued to prosper afterwards.
So really this is a story of boom and bust over a relatively short period of dodgy dealing not the long term demise of an iconic financial institution with long term credentials.

For all those Americans suffering from the meltdown, this is the right time to read a fellow American - Henry David Thoreau! He does have some sound ideas! and his books are not expensive!

The Bank of England today pumped an extra £5bn into money markets in the wake of the crisis at US investment bank Lehman Brothers.

The funds were almost five times oversubscribed by banks, which put in bids totalling £24.1bn - a sign of the fresh pressure on the financial system following the news.

********

Robert- please tell us who these banks are that are looking for liquidity. You must believe it to be in the public interest to tell us as you told us about NR.

Dear Robert
There is more to come AIG, is on the down, and the last 18 months of market share the trend has been continuosly DOWN, according to the graph.
So what is going on, this appears to be driven?

Nobody's yet mentioned that Lehman has around USD 150 billion of debt outstanding, the senior of which (the highest level) is trading at 30 cents in the dollar and the subs (next down) at 5 cents in the dollar... take a guess as to what the rest is worth.

For comparison the next biggest corporate default ever was Worldcom at 30 billion. Even Russia and Argentina, when they defaulted, had half the debt outstanding of Lehman...

What is next, who's going to be next victim next to Leman Brothers
What is going to be the next European Leman Brother

This is seriously bad news for all of us

Dicktownsend (post 42): French anarchist Pierre-Joseph Proudhon said 'property is theft' in his 1840 book 'What is Property? Or, an Inquiry into the Principle of Right and of Government'.

John Locke said, in 1860 "...where there is no Property there is no Justice..." often summarised as 'property is liberty'. Proudhon also said it, and he said 'property is impossible', too.

Not confusion - it depends on what kind of society you're looking at.

The current crisis in the world's financial system is the result of unfettered greed, remuneration that rewards short-term gain at the expense of long-term value, the failure of prudent controls from senior management that long-since ceased to understand the instruments their traders were operating. It has been based not on lower-return but true added-value activities - manufacturing and agriculture - but the elevation of sectors that should serve them (accountancy, law, banking and stock trading) to industries in their own right, making money itself the most easily-tradable commodity. Money is a measurement of value, it isn't value of itself, and depends on belief to sustain it. The gullibility of people in the markets who truly wanted to believe there was a way to huge risk-free gains - or, at least, that there would always be someone else on whom to offload the risk - put the icing on the cake. When belief stumbles - tripped up by the tearing away of the curtain to reveal the lack of substance behind it - collapse of confidence is inevitable. The banks that have 'failed' were never worth anything of themselves to begin with; it was only the value of that which they had invested in that was worth anything. As they had invested so heavily in other banks and financial instruments, there is no bedrock to cushion their fall.

I said that.

Driving a car doesnt kill its occupants. Its being stopped suddenly that does. In the same way theres nothing wrong with credit. It creates wealth, which when spent filters down to the next person. But when you stop it suddenly thats the killer. We need to bring back credit and stop knocking it or we will all feel the effects.

"The global financial economy has never in recent years been tested by quite such a combination of accidents and jolts to confidence."

Tsunamis, earthquakes, and meteors impacting earth are accidents. The financial meltdown which is reminding everyone with a memory of 1929 is not an accident but the result of deliberate human acts over a period of years. It is the direct result of klepto-capitalism American style. A very few people have made billions of dollars and will walk away with the money. Millions of others will be exposed to the free-fall of the "free market".

Meanwhile socialism for the rich and "you're on your own" free-market capitalism for the millions gets another round in the USA and other "western democratic kleptocracies"

Whatever it is it is not an accident.

Re POST 31.

The bankers got us into this mess, but you'd rather listen to another banker telling us it's not all bad?

The world truly has gone mad.

Where were the highly paid Risk Analysts, Senior Management and Risk Directors in all this? At Lehmans, NR, etc? Surely they're sole job is to identify and indemnify the institutions from any unacceptable risk and develop recovery strategies in case of financial meltdown?

Or is the problem that the CEOs definition of "acceptable risk" changed and they stoopped listening to their Risk assessors?

Greedy, incompetent, arrogant... Or all three?

I'm no expert but I do know this is bad news. What happens in the US has an unnerving impact on what happens in the UK. 3 USD to the GBP? I don't think so ... we're on a downward spiral with you!

Didn't the US have a fiscal surplus under Clinton??

Maybe us Brits should have listened to those Euro-crackpots after all. Not long til we adopt the dollar ... (joke) (-ish)

Housing markets have been plain bonkers for at least a decade now. A product is only worth what someone will pay for it, sure, but many people simply don't understand what they can afford. What would happen if interest rates were to hit 10%? (Heaven help us!) There needs to be some way of levelling off house prices but goodness knows how. Businesses can do it. Too late now methinks.

And can we stop criticising people for spelling please? Just because your spelling isn't great or you make typos occasionally (who doesn't?), doesn't mean you can't have an opinion.

#90

It was my understanding it was ALL major high st banks! Lyoyds TSB approached the BOE the week before NR, for example, according to various sources.

There was no element of reprimanding the "upstart" northerners until NR though, so RP kept it quiet!