Lessons from Lehman

PrintEmail

How to mark an anniversary is usually one of the more testing moments of a relationship. When it's an anniversary marking the collapse of Lehman Brothers--an event that brought the global financial system to its knees--flowers and chocolate are hardly appropriate.
 
In what is expected to be his swan song address to the Trade Union Congress as Labour Prime Minister, Gordon Brown noted the anniversary by lambasting the greed and largesse that has spread through the international banking system like detritus.
 
Brown, playing to his audience, lamented the fact that Lehman "was so entangled with the rest of the banking system and saw what was the equivalent of a power cut right across the banking system of the world and trust collapsing."
 
Brown continued by rolling out a laundry list of his efforts to mitigate the fall out from Lehman's collapse. He said very little about the fact that it was his very own regulatory system that failed to halt the subsequent collapse of the Royal Bank of Scotland a few months later.
 
Still, some business analysts, usually known for their prudence, are already talking about a recovery. British banks, led by Barclays (which swallowed up Lehman for a tuppence) and HSBC, are making money again - let the good times roll! The Governor of the Bank of England (and the Prime Minister's favorite punch bag), Mervyn King, even went so far as to claim that the recession in Britain was, finally, over.
 
But it's hard to imagine an economic recovery without fixing a banking system that has been so battered and bruised over the last couple of years.
 
So, what does it look like?
 
Having claimed that he pioneered a bank rescue plan that "saved the world" and - taking a leaf out of President Barack Obama's book - saved or created 500,000 jobs, the Prime Minister clearly thinks that his efforts will be vindicated, even etched into history. Yet, the day before Brown's speech Bloomberg reported that according to Moody's, British banks were "less than half way through posting 240 billion pounds ($398 billion) of losses on loans and securities, a reflection of the country’s economic weakness."
 
Britain's banking sector doesn't look like a template for success, but more like the zombie banks that were propped up in Japan a couple of decades ago.
 
Anyone with even the most elementary understanding of banking knows that a bank will make money by lending to people at a higher rate than they borrow. Given that interest rates sit precariously at 0.5 percent there should be a major incentive for our banking sector to start lending. So why is it that all the main players, including RBS and Barclays, are reining in lending? It is because the banks--long dry--lack capital, too. Unfortunately, our government officials have this superficial belief that the surviving banks are still awash with cash. 
 
As George Osborne, the Shadow Chancellor of the Exchequer, pointed out, it's not a recovery when "the profits that the banks are making are not simply the results of success, they are subsidized profits ... We are underwriting these profits for a purpose--to help recapitalize the banks and support the broader economy, not so that they can be paid out as huge bonuses or distributed as excess returns to shareholders." In other words, a recovery is still way off.
 
In what appeared to be an unnoticed footnote on the dreaded 15th, Barclays (who's president, Bob Diamond, almost single-handedly acquired Lehman and was featured in Esquire this month) was accused of all sorts of chicanery when it ring fenced $12.3 billion of toxic assets by "creating" Protium Finance. As ever, the British tax payer is on the hook.
 
I guess you don't need to get rid of Dick Fuld to run Lehman like, well, Lehman.
 
Read more stories at YPNation.