http://news.bbc.co.uk/1/hi/business/7615931.stm
Why are these companies... that are supposed to be good with money... running out of money?
A very layman question, but sure it's what many are thinking.
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http://news.bbc.co.uk/1/hi/business/7615931.stm
Why are these companies... that are supposed to be good with money... running out of money?
A very layman question, but sure it's what many are thinking.
Not much of a finance expert but I guess it must have something to do with the burst of the us housing market bubble and the credit crunch.
They probably lent out way too much, and people simply could not afford to pay them when things got bad.
Simply speaking, investment banks are the banks for companies. If Tesco needs £500m they can't go to their local branch and ask for it, they have to come to us to get it by issuing bonds (or other things) to investors. So essentially we match people who need money with people who have spare money.
There are a lot of other things done around that and to facilitate that on different levels. If a pension fund needs to buy £100m Government bonds they have to buy it from someone who can get £100m of government bonds (GEMMs).
What went wrong with Lehman, well we were too exposed to mortgages. One way we used to make money was to package mortgages up into these things called mortgage backed securities. When mortgages started defaulting this effected the value of these securities that were on our balance sheet. What made it worse was that no one wanted to buy these securities any more, so even though a fair number of them were still paying interest in full without the defaults affecting it, the market value (the price at which it can be sold) was way below the actual expected value if held until maturity.
Well who is to blame for this? Well 2 parties IMO, 1) Rating agencies should rate what they don't understand themselves. Some of these mortgage backed securities were rated AAA which implies less than ~0.3% chance of default in their opinion. 2) Greed. Too many mortgages were issued because so much profit was being made on these mortgages backed securities. Senior management in Lehman Brothers made the decision to commit to buying too many of these securities. Even up until last week we could have been saved if we accepted Korean Development Bank's bid, but senior management wanted more money for the equity.
Not going to go into any more detail, but there is tonnes of information on ft.com and bloomberg.com. Its a sad day for the city, 25000 people (including me) lost their jobs today :(
if you could only pick one ingredient of the powder keg, it would have to be the black powder :)
There where so many factors, this is whats termed as Correlated Risk.
All to often its simple to look at problems independently, rather than looking at the whole.
The classic example of this is "the monty hall problem", i love this as an interview question. The premise is that you have 3 playing cards, behind two is a picture of a goat, behind the last, a sports car.
The contestant was asked to pick one of the cards, he should be hoping to win the car. The host then turns over one of the goats. The contestant is asked if he wants to stay, or swap.
The question here is does it make any difference at all? If yes, for better or for worse?
Looking at the bigger picture, not just the indevidual peices is VERY hard VERY quickly.
Now, say you had mortgages, 10% of which default. Do you look at the probability of them defaulting independandtly or do you consider what happens if they all start at once, to default. The snow ball that the house prices crash, the market flooded by people defaulting, which means even less is recovered, even worse for the local economy, causing more people to default and so forth.
Some places put all their eggs in one basket, when you've got a team that seams like its making money, you promote them, roll their idea out across the firm.
It takes great management to say "no" we should make less money, by investing in less profitable things, that are different.
Whats really tragic about this one, is that LB encoraged staff to invest in their savings scheme, which is of course now worthless as it was mostly common stock backed (not even prefered stock).
This is bad because its not the rich traders responsible for this, or the management who let it happen, these where the every day hard working bods, often who will of been in completely un-related industries to credit derivs.
So, big banks can fail, the main thing is we have steps in place to prevent it from happing, in the US the fed res garantees the first $100k. In the uk, its only £37,500 for 97.5%. But that said if you've got 15k in the bank your a tit.
Think of it this way, don't do what LB did, spread your risk, even just having 4 bank accounts with different companies, that primarily focus on different markets is a good idea.
**** bud, you where GS weren\'t you?Quote:
Originally Posted by SiM
Nah not at GS, wasn't too fond of the culture there (although I wouldn't turn them down right now!), I didn't really want to say where I was working before... but now it doesn't really matter as I'll be on JSA soon :(Quote:
Originally Posted by TheAnimus
Its a hard time for finding front office jobs in banking now too, I might have to move to the buy side a bit earlier than I planned
a week ago i was thinking "hmm i'm quite immune to this, we've got an intresting in falling ukx/sx5e on the desk i work for, and we're also got some advantageous corrswaps".
Not fealing so smug today... Still as i told my flat mate, we can always declare bankruptcy, bit **** on her but she only owns 1/3rd, so if i fall, i'm taking her with me :(
Wow I actually understood the explanations (SiM TheAnimus)! Woah .... *starts seeing colours*
Nice one guys thanks.
One big, bad move and the bank can go down, its happened plenty of times before. Its something in this industry we need to accept. There were some pissed off traders at all bar one getting hammered all day, some of which won't see any of their $10m+ p&l...
Luckily I don't have rent/mortgage to pay just yet! Otherwise I would be proper screwed considering we probably won't get paid this month
Sorry Steve, for taking this thread in this direction
sucks for you sim. hope if the worst happens you get back on your feet quickly
Thanks. I should be able to find a job in a different area, but it will pay less than my old job. Anyway forget about me, loads of other people are a lot worse off i.e. the employees who had lots of stock - 30% of the firm was owned by employees!
Erk, sorry to hear you've been affected by the turn of events today.
Still, I'm sure pedobear will give you a good reference.
Unluck, dont worry Sim, things should eventually brighten up :) Anyhow thx for explanations (SiM,TheAnimus), never fully understood what was happening.
The answer there is that it might make a difference, or not, and it might be for the better or for the worse, but you can't tell from that exposition of the problem.Quote:
Originally Posted by TheAnimus
Sorry to hear about your loss SiM. Is this something that caught everyone who worked there by surprise, or was the uncertainty very much there for a while?
Well it was a bit of a surprise because Lehman are such a big, old bank. Its was very profitable (until this year) too, so I am still surprised why no one rescued it. I guess most banks are worried about themselves now so didn't even consider it. We did the most trades on the LSE and TSE - iirc ~15% of the LSE volume... so it has hit the LSE quite bad... the stock had been heading downwards for a while, people were upset about that. People were quiet on the trading floor last week, wasn't as loud and lively as it usually is because everyone was worried about their job, their bonus and the share value.
It will make a bad short term difference, we were too connected. The investors will lose confidence in the banks and the markets.
AIG might go bankrupt next, but the fed will probably help them out more because they are an insurance company...
EDIT: this is a good article for anyone interested
Sorry to hear that - good luck SiM
I read about AIG yesterday but as you say I expect the Fed to bail them out. Anyhow I hope they don't go down as they sponsor Man Utd and we need all the money we can get. :DQuote:
Originally Posted by SiM
I'm puzzled, why are people surprised that the banking system is capable of failing? As far as I understand it, the entire system is based on completely variable values and there's very little in the market system as a whole that has a real, fixed worth.
Makes you wonder whether we should finally grow beyond it and move onto some form of energy based currency that values things based on their actual use...
My friend just called me; he works for JPMorgan Chase (or whatever their merger name is). His office shut off external comms for 2 and a half hours to sort out the account with Lehman as well as change payment priorites with two other banks (that are either declaring bankruptcy or close to). The managers were in on Sunday to sort all of this out, and his friend who works for Lehman in the States went to Italy for holiday on the Friday so that would have ruined his entire holiday trip. :(
EDIT:
Really sorry to hear about this SiM. :(
SiM, sorry to hear it mate. Hopefully now though some of the people who keep going on about a recession etc being good for us will at least see that the effects will reach us all in negative ways.
Sorry mate!
Have a read of this from the Devil's Kitchen - hammer, nail, headQuote:
Originally Posted by menthel
This been the internet, someone has explained it much better:Quote:
Originally Posted by Saracen
http://www.youtube.com/watch?v=mhlc7peGlGg
this is just a wounderful example of how complicated statistics can be when people make assumptions about independance.
Monte Hall is a classic question for first year probability students. To summarise it is always better to change because of the conditional probabilities:
a) 2/3 of the time you chose wrong door and then you will definitely win if you change after the other wrong door is picked out
b) 1/3 of the time you will pick the right door first time and then switch to the wrong door
so by changing you win 2/3s of the time rather than not changing which only gives you 1/3 chance of winning
Sorry 'bout the job SiM :eek: Hope all's well by Christmas.
Quote:
Originally Posted by Lucio
Thank God someone said it.
Why should the Fed care? Just a smaller amount of banks for it to control the flow of money through :p.
Good luck getting a job though SiM, your situation sucks big time!
Looks like the US business/10,000 employees has been saved by Barclays...
http://www.ft.com/cms/s/0/5c9dcc26-8...077b07658.html
Hopefully they can work something out for Europe too... Quote from press release:
Quote:
In addition to the agreed transaction, Barclays Capital intends to immediately commence
discussions with the relevant international regulatory authorities to acquire Lehman Brothers’
similar operations outside North America, although there can be no assurances such international
operations will be acquired.
For anyone looking for clarrification on this I just got forwarded this succinct email at work (n.b. I am not the author):
30 Second Idiot's Guide to "What happened at Bear Stearns & Lehmans" (Ex-Lehman author)
It's complicated, but here's the 30-second version of what happened
with Bear Stearns and Lehman:
People went to traditional banks and mortgage brokers and bought
mortgages. All of these mortgages carry different amounts (e.g.
$100,000 mortgage vs. a $500,000 mortgage) and different risk levels.
The ones that are more likely to default have a higher interest rate,
so the bank stands to gain more money...but at a greater risk of the
home owner defaulting on the mortgage.
The problem with this is it is very difficult to balance your risk-
reward ratio. So they created an investment vehicle called a mortgage-
backed security (MBS). This is referred to as a "derivative" because
it is based off of the mortgage. The way it works is the banks
chopped up all these different mortgages into different securities
that were worth different amounts and different risk levels. They
then sold these to other banks and investments firms. The firms who
bought these MBS then received a payment based off of the mortgages.
For the banks selling MBS, it helped them pool risk and generate
capital, and for the firms who bought the MBS, it provided a source of
cash flow with what was thought to be a very safe, secure underlying
commodity: real estate.
Since real estate was so "safe," these banks used huge amounts of
leverage (borrowed money to buy the securities) because they didn't
think they were that risky. Some firms, like Lehman, were leveraged
30:1, meaning that for every $30 they borrowed, they had $1 of
underlying assets. That would be like you making $1000 a year but
taking out a loan of $30,000.
While all this is going on, people are buying up adjustable interest
rate mortgages (ARMs). They offer a cheap introductory rate, but then
skyrocket. So all of a sudden, all these people discovered they
couldn't make their monthly payments. The default rate shot through
the roof. The firms that had purchased MBS did so based on certain
calculations of default. In other words, X number of people could
default on their mortgages, but they could still make a profit and
have a positive cash-flow. However, when the default rate shot up,
this threw all of their calculations off.
Now the firms faced a real problem. They had HUGE amounts of debt on
their balance sheets, and the assets that were supposed to balance
that debt were becoming worth less and less because of the rising
default rate and the drop in housing prices. These are the "write-
downs" that you hear about. The firms had to pay interest on that
debt, but they did not have the corresponding cash flow to be able to
pay the debt. Lehman, for example, had $5.4B of debt obligations last
quarter, but only had $2.3B in income.
When you can't pay your debt obligations, that's called being
insolvent. Many people think that bankruptcy is caused by having more
liabilities than assets, but that's not true. It's caused when you
can't make good on your debts, so the repo man comes and claims your
assets in order to make up for it. When that happens, you have to
file for bankruptcy in order to make sure that people get paid in the
correct order because otherwise different creditors are going to be
suing you to make sure they get what you owe them.
So that's where we are now with Lehman. They couldn't pay their
debts, so they had to file for bankruptcy.
Make sense?
:lol: hahaha that is hilarious
There were loads of cameras outside our building yesterday and on monday too, but I didn't decide to snog someone there :p