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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.
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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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.
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**** bud, you where GS weren't you?Originally Posted by SiM
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
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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
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
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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
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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.
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Unluck, dont worry Sim, things should eventually brighten upAnyhow 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.
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?
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