With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
Anomali recently released a new report that identifies major security trends threatening the FTSE 100. The volume of credential exposures has dramatically increased to 16,583 from April to July 2017, compared to 5,275 last year’s analysis. 77% of the FTSE 100 were exposed, with an average of 218 usernames and password stolen, published or sold per company. In most cases the loss of credentials occurred on third party, non-work websites where employees reuse corporate credentials.
In May 2017, more than 560 million login credentials were found on an anonymous online database, including roughly 243.6 million unique email addresses and passwords. The report shows that a significant number of credentials linked to FTSE 100 organisations were still left compromised over the three months following the discovery. This failure to remediate and secure employee accounts, means that critical business content and personal consumer information held by the UK’s biggest businesses has been left open to cyber-attacks.
The report, The FTSE 100: Targeted Brand Attacks and Mass Credential Exposures, executed by Anomali Labs also reveals that:
- Five of the FTSE 100 companies had more than 1,000 credential exposures, access to these enable cyber criminals to harvest and misuse additional credentials and company data
- The banking sector accounted for a quarter (23%) of the total exposed credentials
“Our research has uncovered a staggering increase in compromised credentials linked to the FTSE 100 companies. Security issues are exacerbated by employees using their work credentials for less secure non-work purposes. Employees should be reminded of the dangers of logging into non-corporate websites with work email addresses and passwords. While companies should invest in cyber security tools that monitor and collect IDs and passwords on the Dark Web, so that staff and customers can be notified immediately and instructed to reset accounts,” said Colby DeRodeff, Chief Strategy Officer and Co-Founder at Anomali.
The Anomali research team also analysed suspicious domain registrations, finding 82% of the FTSE 100 to have at least one catalogued against them, and 13% more than ten. In a change to last year the majority were registered in the United States (38%), followed by China (23%). With the majority of cyber attackers using gmail.com and qq.com (a free Chinese email service) to register these domains to mask themselves. With a deceptive domain malicious actors have the potential to orchestrate phishing schemes, install malware, redirect traffic to malicious sites, or display inappropriate messaging.
For the second year, the vertical hit hardest by malicious domain registrations was banking with 83, which accounted for 23%. This is double that of any other industry. To avoid a breach, organisations have to be more accountable and adopt a stronger cyber security posture, for themselves and to protect the partners and customers they directly impact.
“Monitoring domain registrations is a critical practice for businesses to understand how they might be targeted and by whom. A threat intelligence platform can aid companies with identifying what other domains the registrant might have created and all the IPs associated with each domain. This information can then be routed to network security gateways to keep inbound and outbound communication to these domains from occurring. No one is 100% secure against actors even with the intent and right level of capabilities. It is essential to invest in the right tools to help secure every asset, as well as collaborate with and support peers in order to reduce their risks to a similar attack,” continued Mr. DeRodeff.
(Source: Anomali)
Discussing the latest US tax cuts decision, FTSE updates and bitcoin news, Lee Wild, Head of Equity Strategy at interactive investor, talks to Finance Monthly about the end of year affairs.
With a week to go till Christmas there’s a whiff of Santa rally in the air. Markets should respond well to a ‘yes’ vote on US corporate tax cuts and possible political agreement to avoid a government shutdown on Friday. UK stocks are better value than their US counterparts and, despite the spectre of Brexit horse trading through 2018, there are no obvious banana skins between here and New Year.
In fact, Trump’s tax reform and the failure of progress on Brexit negotiations to revive sterling, will continue to give overseas earners listed here a foreign exchange kick. This, and typically thin trade as investors wind down for Christmas, should allow the FTSE 100 to consolidate gains above 7,500, something it has failed to do thus far. If it does, don’t bet against a new record high by year-end. It’s only one good session away.
An ongoing shutdown of the North Sea Forties pipeline continues to underpin oil prices, with Brent crude looking prepped for a crack at a fresh two-and-a-half-year high.
Whether or not bitcoin traded above $20,000 over the weekend depends on where you get your prices from. According to coinmarketcap.com it peaked Sunday at $20,089.
That bitcoin passed $20,000 for the first time over the weekend is not a surprise. A week ago, with the price at less than $17,000, we said ‘the music may have much longer to play on this one than people think’.
With every new milestone there’s fresh discussion around bitcoin’s legitimacy and potential, both as a trading instrument and revolutionary digital currency. It was the same when it first broke above $10,000 at the end of November. Valuing cryptocurrencies is like sticking your finger in the wind, but traffic is still very much one-way.
Introducing futures contracts in the US was meant to give short-sellers access to the market and improve liquidity, but availability is still fairly restricted. The introduction of bitcoin futures on the Chicago Mercantile Exchange over the weekend may help, but it will take time.
Until it becomes easier to sell short, buying dries up, or there are tech issues or a major hack, bitcoin will keep passing milestones with alarming regularity. Right now, there’s a long queue of investors, both amateur and professional, still waiting for a ride. This bubble is not bursting yet.
With recent news that the pound took a tumble over the weekend, partly attributed to the future of Theresa May as Prime Minister and the upcoming EU summit, rumours that China is looking to open its finance sector up to more foreign ownership, and updates on the latest trade announcement being teased by US President Trump after he pretty much told Japan they ‘will be the no.2 economy’ here are some comments from expert sources on trade worldwide.
Rebecca O’Keefe, Head of Investing at interactive investor, told Finance Monthly: “European markets have opened relatively flat, with the FTSE 100 the main beneficiary after sterling’s latest fall, as pressure mounts on Theresa May who is struggling to maintain her grip on power. The gravity defying US market has been the driving force behind surging global markets, so investors will be hoping that the Republicans can get their act together and deliver key US tax reform to help support the path of growth.
In sharp contrast to Persimmon’s lacklustre results and a gloomy report from the RICS last week, Taylor Wimpey’s trading update is much stronger and paints a relatively rosy picture of the current housing market. Confirmation of favourable market conditions and high demand for new houses is good, although there are early warning signs that the situation might deteriorate, with slowing sales rates and a drop in its order book. Share prices have already come off recent highs, amid fears that the sector had got ahead of itself and investors will be hoping for more help from the Chancellor in next week’s budget to try and provide a new catalyst for the sector.
Gambling companies have been making out like one armed bandits since the summer, as expectations grow that the Government will compromise on a much higher figure for fixed odds betting terminals than the £2 maximum suggested during this year’s election campaign. However, while betting shops are the focus of attention for politicians, the real action can be found on smartphones and elsewhere – with surging revenues and profits being driven from online betting. Companies who have got their online strategy right are the significant winners and although Ladbrokes Coral has seen a 12% jump in digital revenues, the comparison against online competitors such as bet365 and Sky Bet, who both reported huge revenue growth last week, has left the market slightly disappointed and sent the share price lower.”
Mihir Kapadia, CEO and Founder of Sun Global Investments, had this to say: “The last couple of days have seen two of the big global economies China and Germany report large trade surpluses underlining their robust performance over the year. In contrast, the UK economy has been on a downbeat weakening trend as Brexit and political uncertainties lead to declining economic confidence and slower growth.
Data released last month showed August’s trade deficit at £5.6 billion, and in comparison, today’s data of £3.45 billion for September has been a better than expected improvement, but nevertheless indicative of an additive gap that appears unlikely to be closed anytime soon.
While Brexit uncertainty has weakened the pound against its major peers, it had helped boost exports but in turn has also made imports more expensive. This is the short term “J Curve” effect which is often seen after a devaluation. Over the long term, the weaker pound is perhaps likely to help the trade deficit as exports rise (due to the lower pound and higher growth in the global economy) while import growth slows down due to the slowdown in the UK.”
Here Lee Wild, Head of Equity Strategy at Interactive Investor discusses corporate American investment ahead of third quarter reports.
Decent economic data has kept records tumbling on Wall Street, and who’s to say this run will unwind any time soon. Overnight, it’s talk Donald Trump could name Fed governor and market’s choice Jerome Powell as Fed chair Janet Yellen’s replacement that’s driving sentiment.
Winning streaks like this are always difficult for investors, as the head keeps asking how much higher? It requires calm and nerve to hold stocks in these situations, even more to continue buying.
Valuations are toppy in areas of the market both in the US and over here, but history is littered with examples where investors tried to call the market peak and failed. The experts who’ve predicted a crash for more than a year have been wrong, and investors who’d followed their lead will have missed out on substantial profits.
So, there are still plenty of good quality stocks to buy, which are growing profits, pay decent dividends, and have great prospects. That said, corporate America begins reporting third-quarter results in a couple of weeks, and the numbers had better be good, given the size of earnings beats already baked into stock prices.
It’s a big day for ex-dividends in London, among them the third of Next’s 45p special payouts and WPP’s generous interim, which lands highly-paid boss Martin Sorrell another huge windfall.
Even with the impact of ex-divs, the FTSE 100 has significant momentum right now and there’s a great chance it will break above 7,500 soon, putting it within 100 points of a new record. Miners and supermarkets are flavour of the month Thursday.
With little of interest coming out of the European Central Bank’s September policy meeting, it’ll be interesting to see if today’s minutes give any clues as to tapering plans or thoughts about how to handle the strong euro.
After that there’s a jumble of data out of the US, although the chance of any major upset is slim. Many traders could be tempted to keep their powder dry ahead of tomorrow’s US non-farm payrolls.
On 18th April 2017, the UK Prime Minister Theresa May announced today’s snap general election, 8th June 2017. Three years earlier than scheduled, May’s official reason was to strengthen her hand in the Brexit negotiations, which she feared the other parties would try and frustrate.
With 650 parliamentary constituencies, the general public will elect one Member of Parliament (MP) to the House of Commons for each. The Conservatives currently hold 330 seats, with 326 seats needed for a majority.
If the Conservatives add to their seats at this week’s election we could quickly see an escalation to the sterling £; rallying to new year highs of up to $1.32/33. However, as we draw ever closer to Election Day and with it the almost daily release of new polls and surveys showing support for Labour, we are experiencing a few wobbles. Recently, Labour has closed the gap from 20% behind the Tories to just 7% over the campaign, according to the average of the last 8 polls. Significantly, 7% holds a lot of weight – it’s the lead the Conservatives had going into the last election. Anything less than this figure and they could see their majority reduce, not increase.
Markets were spooked by last year’s wrong predictions and false surveys over ‘BREXIT’ and
‘TRUMPIT’. As a consequence, I think any poll or survey needs to be taken with a pinch of salt! Indeed, the latest round of polls over the weekend were also inconclusive. The weekend polls put the Conservative lead at anything between 1% (Survation) and 12% (ICM) - even the pollsters can’t agree. - says Steve Long, Chief Risk Officer at Avem Capital.
A big factor will be the uncertainty of the young vote. Whilst young people are more likely to vote Corbyn, they are also less likely to get out and vote.
The sterling currency pair will be nervous up to Election Day as liquidity and volume dries up and HFT and Algos disappear for a few days.
One question we ask is why make a market to be 5% offside immediately?
Another factor to take into consideration during Election Day will be the timing of the result. The result will likely be announced around 4am, when most of the UK is asleep. Early indications however, may come as early as 10pm on Thursday, when the exit polls are announced. In recent times, these have been generally more reliable than the pre-election polls, with confirmation of their accuracy proving evident as the first results are announced from about 1am onwards.
Possible result outcomes could produce the following permutations:
- A Labour win: £ drops 5/10%
- A Conservative majority: £ increases +3%
- A hung parliament would probably see a 3/5% spike in a very short time…say 30
seconds, before dropping significantly!
Recently we have seen the FTSE benefit from being cheap. This has given exports a helping hand, however a stronger £ would hurt the FTSE especially the FTSE250 which has just topped 20000.
A Labour victory or hung parliament would immediately turn the markets negative. We would likely see scenes similar to the day Brexit was announced, i.e. a 10% drop in seconds. However, before the excitement of Election Day, we first have the ECB and Draghi to contend with. He has already stated that he will say something special!
Taking heed from the Cub Scouts motto, “Always Be Prepared” …you can be assured that at Avem Capital, we are, always! - adds Long.
(Source: Avem Capital)
UK consumer price inflation rose by more than expected to 1.6% in December, from 1.2% in November. Consensus forecasts had pointed to a smaller increase to 1.4%. This is the highest rate since July 2014.
The market reaction to the figures was muted, with both the FTSE and the pound largely unaffected.
The main contributors to the acceleration in inflation were motor fuels, air fares, food and clothing – all of which have been affected by the weak pound. Food producers have faced sharply rising input costs, while oil is of course priced in dollars.
More inflation to come, in the short term at least…
December’s producer price data contains a strong indicator that higher inflation is coming. Input costs rose 15.8% year-on-year – the highest figure recorded for more than five years. It’s unlikely cost increases of this magnitude can be fully absorbed by firms, leaving them with little choice but to pass some on to consumers in the coming months.
The Bank of England says CPI inflation will exceed the 2% target by the middle of the year, though I wouldn’t be surprised if it happens sooner than that. Mark Carney also says the resulting squeeze on household budgets will cause the economy to slow as we move through 2017.
…but longer-term inflation should remain structurally low
However, the effect of the weak pound, assuming it doesn’t fall much further, is a one-off factor which will fall out of the figures eventually. The longer-term picture is one of structurally low inflation – due in part to demographic reasons. The baby boomers are starting to retire and have already gone thorough their consumption phase – they have bought their houses, cars and consumer goods. The younger generation is saddled with debt and struggling to get on the housing ladder. Workers don’t have the bargaining power over pay they once did, and wage growth looks set to be anaemic at best.
All this should mean less inflationary pressure and relatively lacklustre economic growth. Assuming the Bank of England is prepared to ‘look through’ what looks like a temporary spike in inflation, this should mean interest rates remain at rock bottom for the foreseeable future.
Authored by Ben Brettell, Senior Economist, Hargreaves Lansdown.
(Source: Hargreaves Lansdown)
Royal Dutch Shell has announced a £47 billion (€65 billion) merger deal with BG Group, which would reportedly make the combined company worth 9% of the FTSE 100, if it goes through.
The deal, already touted to be the biggest of the year, could produce a company with a value of more than £200 billion (€276 billion).
Big cost savings would result from the merger with Shell and BG Group expected to save $2.5 billion (€2.3 billion) a year, following the deal.
The acquisition would also add 25% to Shell’s oil and gas reserves and a 20% boost to production capacity, with big gains in the Australian liquefied natural gas market and the offshore oil fields of Brazil.
For shareholders and fund managers, the deal could add an extra layer of complexity to investment structure. UK funds may have difficulty accommodating the size of the new enlarged Shell group, because of rules which limit a fund’s exposure to any one company.
“The new merged entity would be by far the biggest company in the UK stock market, and its size would present difficulties for some funds which invest in UK shares. In particular closet trackers and pension funds could eventually find themselves outside of their comfort zone in terms of their active position, unless they rejig the rest of their portfolio to look more like the index to compensate, or abandon their index-hugging philosophy,” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.
The new combined group after merger would make up around 9% of the FTSE 100, based on its current valuation, and around 7.5% of the FTSE All Share. This may in due course present a challenge for some pension funds and closet trackers, which manage their portfolios largely in line with the benchmark index, pointed out Khalaf.
“This is because regulations prohibit active funds from holding more than 10% of their portfolio in one company. While this is not a problem at current valuations, should the combined group breach 10% of the UK stock market, for instance on the back of an oil price recovery, these funds may find themselves having to sell Shell stock to comply with this rule,” he explained.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown
The average UK fund has returned 90% since December 1999, this compares with a return of 68% from the FTSE 100, with dividends re-invested, according to UK investment management firm Hargreaves Lansdown.
With UK managers increasingly investing outside the big blue chips of the FTSE 100, Hargreaves Lansdown says it is more appropriate to compare them to the FTSE All Share, which includes medium and smaller companies.
Over this period the FTSE All Share has also returned 90%, so the average active manager has performed exactly in line with the market, on average.
“While the FTSE 100 has only just recovered its 1999 high, some funds have made serious amounts of money for investors. This tells us some active managers do significantly outperform the index, even if many don’t. If investors can spend a little time picking out the winners, they stand a good chance of making themselves much wealthier,” said Laith Khalaf, Senior Analyst, Hargreaves Lansdown.
Marlborough Special Situations was the best performing fund over this period. It has been run continuously by Giles Hargreave. A £10,000 investment on December 30. 1999 would today be worth £71,770.
Schroder Recovery was the best performing UK fund over this period, excluding funds in the UK smaller companies sector. A £10,000 investment on December 30, 1999, would today be worth £50,877.
The performance of these funds illustrates the long-term rewards on offer to investors who pick good quality active funds. By comparison a typical UK index tracker fund would have turned £10,000 invested in 1999 into £17,900 now.
The best sectors for investment since 1999 have generally been in the emerging markets. Among the UK sectors index-linked gilts led the way. UK Smaller Companies were the best performing UK equity sector, followed by UK Equity Income, with the UK All Companies sector bringing up the rear.
