Posts Tagged ‘financial services’

Lehman Brothers

I‘m not going to write much about Lehman’s demise because there will be thousands of column inches out there (most ignoring the equally important news of the BoA purchase of Merrill Lynch and the problems at AIG). Lehman’s British companies have mostly been put into administration. All I want to note is that in a live interview with the Administrators (PwC) it was stated that some of the best assets left in the UK companies were real estate assets, held in special purpose companies and joint ventures. This shows that – despite the current hand wringing about property markets and reference to ‘toxic’ real estate involvements in the Media – owning real estate assets is safer than lending on them. This is a point I will return to in a future post.


Amongst the carnage on the Stock Exchanges around the world yesterday, HBOS shares took a huge battering again in the UK. Quite why still baffles me, although this article suggests that one reason is that the bank is ‘ so exposed to the mortgage market and falling house prices ‘.

In the current climate, the relevance of falling house prices in relation to HBOS is not that important – the ability of mortgagees to meet their payments is the critical issue. Over the life of a mortgage, a house value can fall below the amount of the mortgage (known as ‘negative equity’) and rise well above it. It has happened to me. This is not a cause for concern so long as the borrower can make payments. Therefore, interest rates and the job market should have a greater impact on HBOS’s position, rather than the state of the housing market. When panic spreads throught markets, logic and common sense seem to go out of the window.

The same applies to commercial property loans, but since they are for a much shorter period, the state of values and the market is relatively more important than for residential mortgages. Nevertheless, so long as a borrower can meet their income payments, only a foolish or desperate bank will force the sale of properties in a weakening market. It will only make things worse – for them and everyone else.


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Bankers’ bonuses get mentioned in the media again and again and again and again and yet again. Much gnashing of teeth and wearing of hairshirts isn’t going to solve the problem, although it is better than ignoring the problem altogether. Whilst it is good that UBS has acknowledged that bonuses should be based on profits, rather than income earned, I find it depressing that in these articles no-one is focussing on two of the points I made in my previous post:-

  1. The differentiation between investment and lending bankers. Not only are their activities quite different and need to be remunerated accordingly, but their contribution to profits (more on that in another post) is quite different.
  2. Any changes must be made across the whole of the financial services industry – not just the banking sector, So long as those who manage capital funds who invest in (and alongside) banks are rewarded with bonuses based on short-term performance, they have no interest at all in seeing changes in the way bank bosses and employees are remunerated.

The BBA have some right to ask that discussions take place behind closed doors (but there is always the suspicion that they might be protecting bank bosses, who they effectively represent), but their implication that any changes must be global is the crucial point: any one country bringing in tightening of regulations can expect to see their financial services industry moving to another country pretty quickly.

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