The Lloyds shotgun wedding with reluctant bride HBOS shows once again that the short sellers, via Spread Betting, CFDs etc, were correct and that the protestations of solidity from the board, the FSA and the Bank of England 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?
Many commentators slammed Northern Rock for its reliance on the money markets, for its business model. Well we can now see that HBOS, Bradford and Bingley, Alliance and Leicester, Lehman, Merrill, Bear Stearns etc had very similar business models. And let us not stop there. In 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 European Central Bank 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. 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.
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. In the fallout of the Lehman and Merrill problems the Morgan Stanley shares 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.
As Simon Denom of Spread Betting Company Financial Spreads recently said “So Morgan Stanley may now go the way of Merrill. This, unbelievably, would leave only Goldman Sachs left of the big beasts over in the US. Many will have heard nothing but good news from the mighty Sachs. And they, like me, might be shocked to hear that even this organisations future is being questioned. Whilst Morgan Stanley fell 50%, they fell 35%.”
Without the big players to generate the lending, the world economy is likely to enter a very long period of stagnation indeed.
'Shorting Banks and the Credit Crunch', Feature by SD, last update: 19-Sep-08
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