The Great Debate UK

from Breakingviews:

Another Lehman will come — and should fail too

The blind self-belief of financiers can't be abolished. Neither can cycles in the industry. But two years after the disastrous failure of Lehman Brothers, regulatory shifts have the potential to reduce the impact of a repeat. The challenge for politicians and watchdogs is not to go soft.

That's what happened before. A munificent Federal Reserve helped stoke a leverage bubble that masqueraded as "the Great Moderation." Meanwhile, financial regulators of all stripes dozed off, encouraged by lawmakers too cozy with Big Finance.

Then there was the costly bust. The swing of the pendulum from greed to fear has produced useful results. One is an effort to create powers for the orderly closure of a firm like Lehman. Tougher capital standards, imposed by market forces and regulators alike, also make sense. New rules and greater scrutiny for the over-the-counter derivatives market, one source of the interconnectedness that made Lehman's failure so painful over and above its size, were overdue, too.

Yet supervisors didn't use their already existent powers energetically enough to crimp the activities of institutions later deemed too big to fail. For all the Basel III talk of building capital buffers in good times, today's response to the financial crisis -- not to mention what little penitence there is on the part of banks -- looks pro-cyclical.

Only the next Lehman will show whether lessons have been learned. Restructured bank pay mechanisms could make excessive risk slightly less rewarding, but bankers won't stop their boundless quest for riches. If Son of Lehman has more capital and a better match between its assets and liabilities, failure will be less likely. And if financial euthanasia becomes an option as intended, the repercussions won't spread as far.

But authorities must remain vigilant and skeptical, over and above enforcing new rules. After all, in mid-2008, Lehman would have comfortably exceeded new Basel III capital standards.

from UK News:

Pru’s Asian misadventure: a cautionary tale

By Clara Ferreira-Marques

Prudential's ill-fated Asian adventure has left the company and its management badly bruised. But it has offered at least two valuable lessons for ambitious executives tempted onto the acquisition path by post-crisis, "once-in-a-lifetime" deals.

Lesson one: It's not 2007 any more, Toto.

Lesson two: Disregard shareholders at your peril.

On the first, bold mega-deals that once impressed the market now seem to mostly unsettle both investors and regulators.

Unease at the Financial Services Authority -- and a need to tick every box -- was responsible for the unprecedented and damaging last-minute delay to Pru's offer details last month.

For that, Prudential can thank the financial crisis, but also Royal Bank of Scotland's near-fatal role in the hubristic and record takeover of ABN Amro -- despite shareholder misgivings and clear signs of an impending crisis.

from Breakingviews:

BP shaping up as Lehman Brothers in the oil patch

BP's deepwater debacle is shaping up as Lehman Brothers in the oil patch. The toxic ingredients that led to that Wall Street firm's implosion are abundantly present in the British energy giant's Gulf of Mexico fiasco: flawed risk management, systemic hazard and regulatory incompetence.

And as in the financial industry, the policy response will almost certainly lead to energy's biggies getting even bigger.

At first blush, the tricky business of drilling oil a mile below the ocean would seem light years from the pin-striped work of investment banking. But fundamentally, the failures of BP's management to prepare for, and then handle the current crisis, evoke striking parallels with those of the bust securities firm.

Nowhere is this more evident than in the realm of managing their respective risks. BP's failure to prevent -- and so far stop -- the leak on the Deepwater Horizon suggests the company did not adequately prepare for the possibility of a spill -- a risk that Chief Executive Tony Hayward put at "one in a million."

Lehman -- and many other banks -- made similar mistakes forecasting risk. Few of their financial models took account of the possibility for "25-standard deviation moves," to use the words of Goldman Sachs Chief Financial Officer David Viniar. The blowout of BP's well, like a 20 percent dip in the housing market, was just such an event.

Similarly, while Lehman's fallout created a shock to the financial system, the hundreds of thousands of barrels of oil leaking from BP's broken well are oozing noxiously throughout the ecosystem of the Gulf, causing untold environmental and economic damage. And the U.S. government has had to intervene to try and contain the oil's spread, just as it did to prevent the impact of Lehman's collapse on the financial system.

2010: Another year, another crisis

- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

If the financial crisis were a theatre production of Hamlet, we would now be at the end of Act III.

But look . . . the audience is already standing up, applauding wildly and putting on their coats. They obviously think it’s all over. Little do they know how much blood remains to be spilled . . . Look at the facts.

The FTSE is up by nearly 50 percent since March, so that it is now more or less back to where it started 2006.  The same is true of gilts, corporate debt, and more or less every other financial asset on both sides of the Atlantic and across the globe. Even the housing market, where it all began, seems to be reviving.

So the crisis must be over, right?

But the jubilation may be premature, because, since Lehman Brothers collapsed in September 2008, policymakers have used every conceivable tool of monetary and fiscal policy so as to restore the status quo ante. Indeed, the success or failure of these policies has largely been judged by the criterion of how far the numbers look normal – where the norm has been redefined to mean “similar to the levels of 2005 and 2006”.

In these terms, the policies, especially quantitative easing, have been extremely successful. In many respects (not just bankers’ bonuses), the clock has indeed been turned back to 2005.

How significant was the Lehman collapse to the UK economy?

- Geoffrey Wood is professor of economics at Cass Business School in London. The opinions expressed are his own -

The collapse of Lehman Brothers on September 15, 2008, was the largest bankruptcy in U.S. history, sparking a crisis that paralysed the global financial system. But how significant was the bank’s collapse to the UK economy? What about other events such as Northern Rock? Professor Wood argues that the fall of Lehman was just one of many symptoms of the recession in this country.

The year of global change: watch our documentary and view our interactive timeline on the fall of Lehman Brothers and the 365 days of upheaval that followed.

Lehman sparks a year of trading opportunities

-Angus Rigby is CEO of TD Waterhouse. The opinions expressed are his own.-

Volatility has been the name of the game since Lehman’s collapse, an event which sent shock waves through the global financial markets. The ripple effect on correlated sectors sent share prices on a roller coaster ride of unpredictable fluctuations throughout the year – and yet at the same time this very volatility paved the way for the profit-taking retail trader, if they got their timing right of course.

Volatility, a dirty word for the long term investor, has been the fuel driving traders who successfully shorted on peaks and bought on lows. Even the Bank of England cutting rates by 1.5 percent to 3 – the biggest single cut since 1992 – failed to slow down individual traders. In fact, in many ways, this has been The Year of the Retail Investor.

Things didn’t look too rosy to begin with though. According to a survey we conducted last December to track investor sentiment, confidence in the financial services sector had dropped significantly. It only ranked at 16th place in the list of sectors expected to perform best this year, a sharp contrast from its coveted 2nd position in the same list in 2007. However, judging from stats that track our customers’ most popular trades, banks have been “Flavour of the Year” this year – accounting for 69 percent of our overall top ten trades.

Banks have always been popular, but they reached new heights in the aftermath of “Black Monday” in September 2008, with Lloyds and RBS the most traded stocks by volume. These two banking giants have accounted for 21 percent of our overall top ten trades in a rocky year of mergers, rescues, rights issues and redundancies.

Barclays, which narrowly escaped a government bailout thanks to a last-minute cash injection from its middle eastern investor, followed closely behind Lloyds and RBS in popularity, holding a fifth (20 percent) of the top ten trades in a year which saw its share price soar more than 500 percent – a good opportunity to profit with a well timed trade.

from Commentaries:

‘Living wills’ easier said than done

In the wake of the widespread chaos that accompanied the bankruptcy of Lehman Brothers last September, regulators have sought to find a better way to unwind global financial giants. One approach is that the banks themselves should prepare for their own orderly demise -- a kind of "living will".

That idea has been gathering steam of late. The G20 group of finance ministers and central bankers meeting in London over the weekend agreed to require "systemic firms to develop firm-specific contingency plans."

The concept has wide appeal. The crisis has convinced politicians and regulators of all colours that even large financial institutions must be allowed to fail without imposing a huge burden on taxpayers. Many bankers see such a regime as a preferable alternative to more intrusive regulation.

However, drawing up a detailed "living will" is easier said than done.

Simon Gleeson of Clifford Chance argues that it is more important for regulators and legislators to establish a cross-border crisis-management and resolution regime than it is for individual firms to prepare for their own demise.

The mandate of the Financial Stability Board (FSB), the international body comprising finance ministries, central banks and financial regulators, was recently expanded to include contingency planning for cross-border crises. It published a series of relevant principles in April. However, as the Institute of International Finance (IIF) noted, it is "clear from the high-level nature of the principles and the aspirational language [that] there remains a lot to be done."

The IIF is calling for the FSB to develop a convention on crisis management that would include detailed rules, including on early intervention. It also wants the FSB to run cross-border crisis simulations of the sort routinely carried out by domestic regulators.

from Commentaries:

Banking? Keep it simple stupid

In 1873, Walter Bagehot wrote that "the business of banking ought to be simple; if it is hard it is wrong." He would have struggled to recognize today's banking system.

It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.

Complexity -- as Bagehot predicted -- has become a curse. If nobody can understand financial firms, they will become ever more accident prone.

The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.

Regulators too could be forgiven for scratching their heads.

"Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships," former Fed official Vincent Reinhart has written.

Indeed Basel II -- the international capital code -- was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.

Managers face crucial new challenges in recession

- Dr Martin Clarke, Director of Leadership Development Programmes at Cranfield School of Management in the UK. The opinions expressed are his own. -

With an understandable focus on the short term demands of recession, the leaders’ role of generating debate about future priorities is never more crucial.  In difficult times the tendency to force decisions, to be seen to act, can often mean an organisation’s strategic assets can get thrown out with the bath water.

Leaders who can create space for informed discussion will not only ensure that tomorrow’s plans are well grounded but also provide the foundations for committed and engaged execution as the upturn begins to gain traction. Such strategic debate is predicated on two key leadership attributes.

First, it requires a well developed external perspective; a knowledge of what is going around your business, a facility that was apparently in short supply in Lehman Brothers. This extends beyond the occasional external contact and attendance at industry events. It demands disciplined attention on and engagement with diverse events, people and ideas that may well fall outside an executive’s comfort zone.

Secondly, it requires leaders who are capable of arguing through the morale dimension of business, not just in terms of “right sizing” but in considering the difficult challenges faced by the corporate survivors who are often asked to work more for less. This kind of debate is personally demanding, often requiring challenge when tolerance for the airing of differences can be seen as unproductive.

When will discussion about alternatives paralyse rather than enable debate? When is it OK to roll over and go along with the prevailing view (whilst quietly developing plan B)?

In the end, these questions raise a personal morale choice that sits at the heart of leadership, in recession or out of it: just how much of myself am I prepared to invest in the responsibilities of being a leader?

from Commentaries:

Time to get tough with AIG

It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.

Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.

And in the short term, Benmosche's vacation strategy appears to be paying dividends.

This week, AIG's shares surged 44 percent, to nearly $50, after Benmosche said that he intended to move slower than his predecessor in selling off AIG's still viable divisions.

Maybe Benmosche should consider relocating AIG's headquarters to Dubrovnik.

But the big run-up in AIG shares is merely a sideshow for momentum players, speculators and Hank Greenberg, the former AIG chieftain who controls about 11 percent of the company's outstanding shares.

The reality is that AIG exists today only because of the $180 billion lifeline the insurer has received from the federal government. Even Benmosche acknowledges that, telling The Wall Street Journal: "If the U.S. government doesn't continue to support AIG, we will fail."