Tuesday, September 04, 2012

HISTORY LESSONS: LEHMAN BROTHERS

On the 2nd anniversary of the Lehman Brothers debacle, what is evident is the fact that economies have learnt very little from history. B&E does a quick recap of the occurrence, the domino effect and the current global economic situation By Asif Ahmed

According to BIS-FSB & IMF assessment of the increased capital requirements (phased in over 4 years), each one percentage point increase in bank’s actual ratio of tangible common equity to risk-weighted assets will lead to a decline in the level of GDP relative to its baseline path by about 0.20% after implementation is completed. Now, has all this started helping? IMF’s Global Financial Stability Report 2010 shows that global bank writedowns declined to $2.3 trillion in April 2010 from $2.8 trillion in October 2009. This in reality brought down aggregate capital needs of the global banking system. Specifically in the US, banks saw their loan writedowns and provisions for the period 2007–10 being revised downward by close to $66 billion to $588 billion due to positive economic growth and stabilisation of house prices in the latter half of 2009; foreclosures and mortgage delinquencies are still on a rise. The IMF report, however, does caution that pockets of capital deficiency “remain in segments of some countries’ banking systems, especially where exposures to commercial real estate are high.”

Challenges Ahead
Challenges are not insurmountable, yet extremely tough both for emerging economies (leave exceptions India and China) to maintain their current growth and for advanced economies to get back to shape. As a direct effect of attempting to save drowning economies by investing borrowed capital, the cumulative sovereign debt levels of G7 nations as a proportion of GDP, at close to 110, is now reaching 60-year highs. We saw the trailer of problems associated with sovereign debt in May this year when Greece – a country which contributes negligible in terms of economic output and trade – made the life EU more difficult. A possible concern is that a sustained period of debt reduction might lead to low growth in the future. For advanced economies, dealing with unemployment is another top challenge that needs to be tackled head-on. US unemployment rates are at historic highs too (10.6% in January 2010, down a bit to 9.6% in June 2010). One must remember that an economic recovery that does not translate into more jobs will not mean much for most people. So creating jobs in a foregone ask, another challenge that is common to both emerging and advanced countries is dealing with burgeoning budgets deficits, more so with US and EU, the taps that were opened to support growth almost two years ago are still running and now pose serious macroeconomic threats.

What started as a pure US isolated case of a financial institution called Lehman collapsing is now a case study in history of how a domino effect can cause global recession. And what about Mr. Paulson? Well, he apparently is making quite a good royalty on the sales of his new book – On the Brink: Inside the Race to Stop the Collapse of the Global Financial System…


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posted by Editorial at 1:47 PM