The world’s financial markets remain at the eye of a perfect economic storm. The architects of this almighty financial sell-off? The banks themselves.
The markets are in complete disorder, yet they remain unable to solve the situation themselves, and so go looking for a public sector bail-out.
Risk management, the buzz word of the financial markets since the collapse of Barings Bank in 1995, is clearly an oxymoron.
American institutions such as Bear Stearns, Fannie Mae and Freddie Mac, Merrill Lynch, Lehman Brothers, AIG and Morgan Stanley have run into severe financial difficulty. Two of those firms have hit the wall, the remainder have had to look for bail-outs.
In Britain Northern Rock’s problems are well documented, while increased speculation and uncertainty have led to a takeover of HBOS by Lloyds Bank. And, in the most glaring example of capitalism gone wrong, the Russian stock market was forced to close its doors for two consecutive days last week. For a system that is built and flourishes on confidence, the future is extremely uncertain.
These are clearly worrying times and there is no real end in sight. The banking system in the United Kingdom is technically insolvent — the value of outstanding mortgages and loans stands at £256-billion while the value of deposits is only £160-billion. A re-evaluation of the banks’ property portfolios and likely bad debts would paint a bleaker picture still. Banks are not lending to one another and the daily operation of the system is reliant on handouts by central banks. Last week saw a massive $180-billion of liquidity pumped into world money markets.
The authors of this horror story — the banks — are not just technically insolvent. They are morally bankrupt. The onset of these problems dates back more than a decade, with the subprime crisis exacerbating the problem 18 months ago. At both a micro and a macro level credit became far too easy to acquire, leading to businesses and individuals increasing their exposure at a record pace to record levels.
Who is responsible? Those same bankers who convinced you that another loan was not a bad thing. Those same bankers who convinced every wannabe property developer that it should leverage its portfolio and increase its volume of business. And unquestionably culpable were the investment bankers who wrapped up the subprime debt in exotic parcels and visited your offices to sell you this most fantastic investment vehicle.
The property market has collapsed and probably still has further to go, the tremors from the subprime crises are still being felt, and the combination of the two sees the whole financial system in peril. Quite simply the banks have traded recklessly in the past 10 years and have put everybody’s wellbeing at risk. Anybody and everybody could get whatever credit they wanted as recently as three years ago.
I returned from Singapore in 1999, responsible for £862-million losses that brought down Britain’s oldest investment bank, personally liable through an injunction for £100-million and yet within the space of a week had been offered five different credit cards. Ridiculous!
Any central bank will tell you that the system exists on the premise of “responsible lending”, but the experiences of the past few years clearly show this is utter rubbish.
Several more banks will fall by the wayside and the ultimate cost will be borne by all of us. Tens of thousands will lose their jobs and that will create further pressure in an already exhausted marketplace. For my role in the collapse of Barings I was pursued around the world and ended up being sentenced to six-and-half years in a Singaporean jail.
Who is going to go after the individuals responsible for this financial catastrophe?
Apparently no one. Who is going to bail out the businesses and individuals who are struggling at the moment? The banks? Not a chance: self-preservation is the only thing on their minds at the moment. The rest of us will be left to our own devices.
Nick Leeson was the trader who brought down Barings Bank in 1995. He is now general manager of Galway United FC