I think there are three main reasons why banks have been collapsing:
1. Gearing
Commercial companies should get at least half their funds from equity. Banks routinely operate with much, much less equity.
2. Matching
Borrowing periods should match the life of the assets they fund. Banks routinely borrow short-term to lend long-term.
3. Sensitive giants
Many large banks are too dependent on market and customer confidence for their health.
Solutions may include:
1. Increasing the minimum equity requirement
2. Monitoring average asset life to ensure it is commensurate with average borrowing period
3. Financial institutions may be forced into smaller saleable units
Item 1 is likely. Item 2 will probably be missed. Item 3 will probably not be taken up because there are too many vested interests in larger concerns. Even though small may be beautiful, large concerns are not in it to create beauty!
Thursday, September 18, 2008
Sunday, September 14, 2008
Lehman Brothers in difficulties
Lehman Brothers, an investment bank based in New York, is in trouble.
Over the last 14 years, chief executive Dick Fuld (nickname The Gorilla), had transformed the bank into one of the most competitive on Wall Street.
Since 2004, Lehman Brothers has expanded rapidly into mortgage lending. Now it is stuck with around £40bn of commercial-property assets in a property slump, and significant exposure to debt trading in a credit crunch.
The share price has plummeted, from $60 in January, to $30 in June, and from $15 to $4 during September.
Last week Fuld announced a bold recovery plan, hoping the market would regain faith in the bank's prospects. But the share price seems to be continuing to fall.
Prospective buyers (e.g. Barclays) have said they would like government guarantees. But the U.S. government has a lot on its plate at the moment.
If no buyer comes forward, it remains to be seen how long Lehman Brothers can survive.
Over the last 14 years, chief executive Dick Fuld (nickname The Gorilla), had transformed the bank into one of the most competitive on Wall Street.
Since 2004, Lehman Brothers has expanded rapidly into mortgage lending. Now it is stuck with around £40bn of commercial-property assets in a property slump, and significant exposure to debt trading in a credit crunch.
The share price has plummeted, from $60 in January, to $30 in June, and from $15 to $4 during September.
Last week Fuld announced a bold recovery plan, hoping the market would regain faith in the bank's prospects. But the share price seems to be continuing to fall.
Prospective buyers (e.g. Barclays) have said they would like government guarantees. But the U.S. government has a lot on its plate at the moment.
If no buyer comes forward, it remains to be seen how long Lehman Brothers can survive.
Friday, September 12, 2008
XL Leisure Group goes into administration
XL Leisure Group plc, the third-largest player in the UK holiday market, has run out of funds.
Today the group went into administration, which means it applied for court protection from its creditors to see what can be saved. In all, eleven companies are listed on the Group's announcement. Four individuals have been appointed by the court to run the companies' affairs.
The first decision the administrators had to make was: should the group continue trading? Their decision was no. All aeroplanes have been grounded, and all flights cancelled. Once a business becomes unviable, total collapse is usually quite quick, because no-one wants to trade with it.
The group had grown quickly since a management buyout in 2006. Fast-growing companies need a lot of cash to grow, and so are particularly vulnerable in a downturn if their bankers decide to call it a day.
Today the group went into administration, which means it applied for court protection from its creditors to see what can be saved. In all, eleven companies are listed on the Group's announcement. Four individuals have been appointed by the court to run the companies' affairs.
The first decision the administrators had to make was: should the group continue trading? Their decision was no. All aeroplanes have been grounded, and all flights cancelled. Once a business becomes unviable, total collapse is usually quite quick, because no-one wants to trade with it.
The group had grown quickly since a management buyout in 2006. Fast-growing companies need a lot of cash to grow, and so are particularly vulnerable in a downturn if their bankers decide to call it a day.
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