Banks now much more cau­tious

Since Lehman’s col­lapse the big­gest change has been that in­sti­tu­tions re­alise the im­por­tance of their rep­u­ta­tions

Financial Mail - - MONEY& INVESTING - Tim Co­hen co­hent@busi­

A decade ago this month, the cen­tury-old US in­vest­ment bank Lehman Broth­ers de­clared bank­ruptcy. It was the largest cor­po­rate fail­ure in US his­tory at the time and it marked the of­fi­cial start of the Great Re­ces­sion.

How have banks, lo­cal and for­eign, changed over the decade for the bet­ter — or for the worse?

Banks, not only in the US but around the world, were at the very cen­tre of the cri­sis, cre­at­ing a pow­er­ful vor­tex when they re­treated and pulled in not only each other but whole economies.

Be­hind the banks lay a boom­ing prop­erty mar­ket, un­der­pinned by the end of the Cold War, global eco­nomic ex­pan­sion, es­pe­cially in Asia, and the sense that a brave new world had be­gun.

Lehman Broth­ers had tried to lever­age this ex­pan­sion ag­gres­sively, not only di­rectly but also in­di­rectly with new fi­nan­cial in­stru­ments such as mort­gage-backed se­cu­ri­ties and col­lat­er­alised debt obli­ga­tions.

One Lehman di­vi­sion pro­vides an ap­po­site ex­am­ple. In 2003, the Lehman home loans di­vi­sion made $18.2bn in real es­tate loans.

By 2004, this num­ber topped $40bn. By 2006, its two real es­tate units were lend­ing al­most $50bn a month. In 2008, Lehman had as­sets of $680bn but only $22.5bn in cap­i­tal, which meant that a 3%-5% de­cline in real es­tate val­ues would wipe out all cap­i­tal.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.