The Run on Banks and the Credit Crunch
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Lloyds TSB shotgun wedding with reluctant bride HBOS shows once again that the short sellers were correct and that the protestations of solidity from the board, the FSA and the BOE were straw in the wind. Who do we believe now? The Authorities? Who have claimed time and again, both here and across the pond, that this bank or another is as safe as houses only for them to be proved wrong. Or the Markets? Who have searched out weakness wherever they can.
Everyone slams Northern Rock for its reliance on the money markets for its business model. Well we can now see that HBOS, BB, Alliance & Leicester Spread Betting, Lehman, Merrill, Bear Stearns etc etc etc had (effectively) exactly the same model. And let us not stop there … in all truth every bank on the planet is reliant on the money markets for its liquidity. Remove confidence and you remove the bank. Over in Europe the ECB has been lending mind boggling sums virtually every night for the last ten months which has had the effect of propping up their banking systems. But by what criteria are they lending their money? In Spain property has fallen far further than either the UK or the US but nobody seems to be bothered about Spanish Bank stability.
HBOS had, apparently, some £126bn of loans requiring refunding in the next year. This load has now been passed to Lloyds. One has to assume that the Lloyds Board has extracted a very, very firm promise from the BOE that they will step up to the plate as the lender of last resort otherwise the taint of fear will now pass to them. The BOE is now regularly injecting over £20bn into the money markets and one cannot help but speculate that if they had stepped up to the plate last summer for poor old Northern Rock whether the entire banking problem could have been nipped in the bud at that time.
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Morgan Stanley is now in the sights of the pack as anything even remotely weakened by current events seems fair game for the predators. The stock had been looking reasonably firm, for a bank, having dropped less than 20% from $53 to $43 since the New Year. Until this week, that is, when it dropped by over 50% in just four trading days. The problem is that as soon as the whispers and rumours begin the afflicted bank finds it impossible to rollover interbank loans as counterparties insist on repayment. Any normal bank will have billions of dollars/pounds requiring rollover each and every day and not only this but many longer term loans can have early redemption if requested by the lender. Money Desks quickly become swamped with withdrawal requests and are unable to replace the hole in the finances quickly enough to ‘flatten’ their books. Even banks MUST have matched books at the end of each and every business day. For every pound out in loans they must have a pound of deposit. So Morgan Stanley is now rumoured to be in talks with Wachovia and several other major banks and it must now be feared that yet another investment bank will go the way of Merrill.
This, unbelievably, would leave only Goldman Sachs left of the big beasts over in the US. Readers, who will have heard nothing but good news from the mighty Sachs, might be shocked to hear that even this organisation’s future is being questioned. The Stock has fallen 35% in the last four trading sessions.
Without the big players to generate the lending the world economy is likely to enter a very long period of stagnation indeed.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
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'The Run on Banks and the Credit Crunch' edited by SD, updated 18-Sep-08
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