Don't shed too many tears for Lehman Brothers and their ilk, but do look at the bigger picture...
The news of Lehman Brother's collapse sent stock markets around the world tumbling in scenes eerily reminiscent of the 1920s. But we shouldn't feel too sorry for them. It was, after all one of the very institutions that spent the last few years engaged in precisely the kind of high risk tactics that have brought us to the perilous position we find ourselves in today.
Lehman et al have been engaged in a feeding frenzy of greed for decades, ever since the Thatcher/Reagan axis removed market controls that were put in place specifically to prevent the kind of insane risk taking that precipitated the 1920s crash and subsequent depression. OK, some will argue that the actions of institutions like Lehman Brothers have been good for everyone for a long time, as a relatively stable, largely self regulating, global economy has contributed to better quality of life for many.
They'd have a point of course, but there is a world of difference between prudent self regulation and some of the high risk tactics of recent years. Handing out 125% mortgages willy nilly and rewarding staff with obscene bonuses to play fast and loose with depositors’ money was never a good idea, whilst allowing the kind of frenzied speculation that can bring a currency to its knees almost overnight is criminal.
In fact, it's hard not to agree with The Guardian's Simon Jenkins when he argues that "the victims of the credit crunch are not just a few wild traders. They are all participants in the UK economy." It's just as hard to argue with his desire to "arrest and try all those whose stupidity and greed are about to cause untold hardship to millions". After all, as he rightly points out, there are few other walks of life in which a small number of people can wield such power over the rest of us, but walk away with nothing more painful than a P45, bruised pride and a healthy bank balance when they get it horribly wrong.
And make no mistake, whilst Lehman Brothers was principally an investment bank affecting only a small proportion of the UK public directly, the knock on effects chime right through the economy, and that affects us all.
For starters, it kicked off a (so far) two day rout of stock markets worldwide, which saw £20bn wiped off the value of the UK's largest defined pension schemes overnight. To put that in context, the overall funding shortfall facing those same schemes has now jumped to £70bn.
More worryingly, the shock waves are still reverberating through the British banking system. Angela Knight, chief executive of the British Bankers' Association, kept a straight face, telling us not to worry: "Undoubtedly this is a momentous day, but it's important to note that Lehman's was an investment bank, and as such its impact will not be felt directly by bank customers over here."
Meanwhile, the FSA was demanding detailed information from every bank remotely affected by the Lehman fallout and, HBOS (which owns the Halifax – Britain’s biggest mortgage lender – and Bank of Scotland) was taking a hammering on the stock markets. Its share price dropped 40% in a matter of days, and it now seems certain to be acquired by Lloyds TSB. Given that HBOS holds one in every five pounds of the nation’s savings, can we worry yet Angela?
At the same time, the nationalisation trend continues. The US government was forced to step in again this week to prevent the collapse of AIG - a "disorderly bankruptcy that threatened to wreak havoc with fragile financial markets". Don’t worry though, AIG's policy of insuring against default on 'complex and exotic' investment instruments linked to sub-prime mortgages will only cost the US taxpayer $85bn, and they get to own 80% of a broken company. They must be chuffed to bits.
The longer term effects are harder to predict. However, it seems certain that interbank lending will grind to a halt once again, bad news for homeowners and mortgage rates and, as the 'adjustment' continues, some predict 100,000 City jobs will go. Poor them. But let's remember that it's thought that for every ten jobs lost in the City, a further seven are lost in the real world. Poor us.
So, what should we all be doing? Well, work hard and be indispensable for a start. Then look at where your money is stashed. Remember that the first £35,000 of every savings account is protected by the government so, if you are lucky enough to have more than that, spread it across more than one product. But, and it’s a big but, make sure you save with institutions that are not linked (like Abbey and Cahoot for example), otherwise your savings may be treated as one lump anyway.
If you have investments, or investment linked savings products, you’ll have already felt the pain. All you can really do, aside from cutting your losses, is sit tight and wait for them to recover.
I don’t know, maybe we should just all start shoving our money under the mattress.
the greed of corporate managing directors giving themselves / accepting huge bonuses is a good example of the worst aspect of consumerism. its obscene considering how many people in the world do not have enough food and water. the system these people have developed and support is draining the world of precioius resources.
Your last comment must be on everyone's mind currently. Who can you trust? Investing anywhere safely inevitably depreciates an investment, in real terms. The only people that earn off ones investment are those that take their cut off the top. Then, if things go wrong they simply walk away; thank you very much. I believe that greed and ambition are bedfellows that will bring down the West. Already companies are wanting global slices of the cake and this overcomplicates the integrity of a company to the degree that really no one cares about the investor at all; they are simply there to supply funds allowing excessive saleries to be earned by, in the main, incompetants. I know that sounds harsh, but the truth is that when things go wrong-they cannot put them right; ergo, incompetants. They should jail anyone that oversees disasters like AIG and HBOS; they should not be allowed to walk away with their millions.
Leadership is not about going with the flow. For example, when everybody is panicking and rushing for the door, holding the door open is not leadership.
Appealing for calm is. I don't find fault with Ms Knight's attempt to appeal for calm so I take umbrage with the author's tone of "see there" superiority.
In fact, what we have here is a crisis of confidence. It is important to remember that the vast number of banks are very much sound, and reminding everyone about what still works is much more productive than yelling "we're all going to die".
The McMansions that were built with the bad mortgages causing the crash have no value now! Most of them, once foreclosed, are routinely stripped of all copper wiring and piping, marble counter tops, electrical fixtures and stainless steel sinks. Anything of value to the scrap metal yards is stolen in the night by bands of very skillful house strippers to be exchanged for dope on the streets. The buildings are ruined in the process, leaving everyone a looooser. Cops in American cities and suburbs are simply incapable of protecting the property of the banks, and secure their jobs by visibly protecting the voting public first! If 'zero running cost, zero upkeep" eco-smart, small and practical homes had been built the story would be a happy one. Now, as it is, we will have to pay someone to demolish the ruins before replacing them with realistic dwellings - so much for the Hollywood, magazine based lifestyle, the dream has cost many their futures and the Great Depression is upon us.