To many of us it still feels like yesterday; the 2008 banking collapse, that apparently caused the downfall of the global banking system, had its anniversary on Monday. It started with Lehman Brothers, causing a contagion, eventually bringing down other investment banks with it, whilst sending Western Hemisphere economies into a tailspin of immediate decline. The fact that there were worrying signs signalled by another bank, Bear Sterns, a year earlier, it being unable to pay its debts and cover its counter party obligations, is a subject for another day given that history has airbrushed Bear Stern’s heralding 2007 failure out of banking folklore in favour of placing the simplistic blame on Lehman alone. Now five years on has the western banking system ‘learned its lessons’, or are we watching another slow motion train wreck unfolding before our eyes?
One aspect most casual readers will be unaware of is the fact the five years on Lehman does in fact still exist, two thirds of the original 500 London staff are working for the company whilst it’s under the administration of Price Waterhouse Coopers. The size, reach and scope of Lehman’s activities meant that the administrators could not possibly unravel the complex collapse without the assistance of those who were present during the downfall. And according to the current administrator the belief is that all Lehman’s creditors will be eventually paid in full.
Now surely that’s a good sign and many would suggest it reinforces their original contention that Lehman was used as a scapegoat, a valve for the banking cartel to release and focus all its pressure and failures onto and through. However, there are highly credible voices being raised consistently that the Lehman issue and the crisis that followed was not really tackled. What’s worse the belief is that the banking system may be constructing a far bigger ‘bonfire of their vanities’ than witnessed during the previous collapse…
William White, the Bank for International Settlements (BIS) former chief economist, is now chairman of the OECD’s Economic Development and Review Committee. He obtained considerable, deserved credibility after he ‘successfully’ predicted the 2007/2008 market crash and the liquidity crisis that then followed in the form of the credit crunch. He stated recently in his position as chairman of the OECD department;
[quote]“This looks like to me like 2007 all over again, but even worse. All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle.[/quote]
[quote]“The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering, but there are a lot of things that can go wrong. I very am worried that Abenomics could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks.”[/quote]
Mr White believes the global financial system has now become addicted to ‘cheap’ easy money, as rates fall lower with each individual cycle and crisis, hence there is little wriggle room left in his opinion, should the system break again.
[quote]“I don’t know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel.”[/quote]
The share of “leveraged loans” used by weak borrowers in the syndicated loan market has now risen to an all-time high of 45 percent, unthinkably this is now ten percentage points higher than the pre-crisis peak in 2007-2008. The BIS have concerns that interbank credit to emerging markets is now the highest level on record, whilst the value of bonds issued in off-shore centres by private companies in China, Brazil and other BRIC nations actually exceeds the total issuance by firms from rich economies for the first time, illustrating the huge size of the debt build-up in Asia, Latin Africa, and the Mid-East and moreover just how quickly this build up has accumulated.
Claudio Borio, the BIS research chief;
[quote]“Global financial markets have reacted very strongly. If there were any doubts about the strength of international policy spillovers, they have now been put to rest. Nobody knows how far global borrowing costs will rise as the Fed tightens or how disorderly the process might be. The challenge is to be prepared. This means being prudent, limiting leverage, and avoiding the temptation of believing that the market will remain liquid under stress, the illusion of liquidity.”[/quote]
