Capitalism breaks

[northwind]

So, capitalism broke today... Don't know if you noticed. HBOS, One of the country's stronger financial institutions and the UK's biggest mortgage provide just got driven into a likely merger (which will be approved, riding roughshod over all monopolies and mergers practice) by nothing more than the stock market in all its glory.

The company is exactly as solid financially as it was last month, and stronger than it was 6 months ago, but suddenly people are talking about whether or not it'll survive- and not because the company's making a loss or not secure or underfunded, or even because of panic-withdrawals like Northern Rock, but purely because the shares dropped in value. The FSA still consider its funding solid, and it has no capital shortfall and less exposure to the credit crunch than most large financial institutions.

Of course, the shares largely dropped in value due to shareowner panic selling, premeditated short-selling, and wider market speculation, wiping billions of pounds of value out overnight for no practical reason whatsoever. By any real assessment, the company was in no danger at all, and was in fact stronger than its competition, but the imaginary value of its shares outweighs the real value of the company. It's as though someone's stuck a £1000 sticker on a £10000 car in a showroom, and then the shop's happily sold it to them without noticing the big £10000 sticker behind it.

So, this is what happens when the lunatics take over the asylum. Isn't it bracing! We all live in this system and it's run by... nobody. And now it can't even be counted upon to look after itself, never mind anyone or anything else. The idea that the market will take care of itself and run in its own best interests always looked ridiculous to most people, but now it's proven to be such- it's a shepherd who'll kill his flock to make it easier to shear.

Maybe I'm a bit biased I'm not going to lose my job over it, at least not in a hurry, but a lot of people are.

Oh if only I had a large lump of readies under the mattress right now! All those juicey bargain shares to be had and no reason to expect a long term involvement for a handsome return...sighs.

When I was the company solicitor at Birmingham Midshires, the Treasurer was one Dan Watkins. He is now HBOS's Treasury Director. He was a practical and likeable bloke. I can only speak as I found. I simply cannot believe that he would have done anything to place his bank in jeopardy. He was honest and trustworthy, risk-adverse, and a strategist. I got on well with him. i used to write occasional letters for him mainly to swap counterparties who were being awkward. Unlike others there, I had the greatest respect for him. He was one of the few senior managers who weren't full of bullsh!t.

I've been thinking of him today and how he must be feeling, watching his bank being wiped out.

DO you reckon it is capitalism's fault, or the fault of a sensationalist media and a majority population of dumb sheep?

Originally Posted by Warthog

DO you reckon it is capitalism's fault, or the fault of a sensationalist media and a majority population of dumb sheep?

Greedy shareholders. Only they could approve the risk of sub-prime lending in order to reap the potential profit. Most of them have forgotten the 'your investment may go down' bit.

But then consumers were happy to buy things they couldn't afford on credit they couldn't pay back.

Which is worse?

Sadly there are many people who have the cash to invest but are extremely ignorant of many basic economic principles. Hence knee jerk reactions which do nothing but completely undermine the market and exagerate any blip.

The mortgage situation in the U.S was though a very dangerous risk to take and I cannot believe that it was allowed to go on at the levels talked about.

[the_lone_wolf]

the OP has deeper meaning if you play this youtube video whilst reading...

http://uk.youtube.com/watch?v=WWsFntAmE3k

I might nip into Halifax tomorrow and see if I can get hold of some shares, especially if they get taken over tonight.

I have a close friend who sells, arranges and collects on sub-prime loans. When times get tough like they are about to, he swops jobs to become a debt collector and repo-man. He's worth quite a bit for a 35 year old maried guy, owns his 3 bed semi outright, has a fair few flash bikes, toys etc, all bought and paid for. His wife underwrites large loans for a major car leasing company, she doesn't do so bad either.

When he starts reposessing cars I may go to work with him.

[northwind]

Lets be totally clear here, today's situation is nothing to do with sub-prime lending or overexposure to bad debt. That's what's set up the possibility for what's happening now, but HBOS had already taken the hit for its involvement in sub-prime US markets, and now it's less exposed than most UK banks. Its overall risk exposure has been falling for the last year, and its available capital has, I think, never been higher. In the real world, the company's still as strong as it was 6 months ago, less exposed to bad risks, and in no danger whatsoever of going out of business. We'd even survive a Northern Rock-style savings run, better than any other UK bank could (we have greater percentage of disposable assets and a huge cash pool) There was speculation in the press that we'd have trouble refinancing $200 million worth of loans this year, which is madness, we have cash assets around 15 times that big let alone disposable assets and guarantees!

HBOS has actually been taking a beating for doing all of these pragmatic things- Andy Hornby got mauled in the press for issuing pessimistic market predictions right at the start of the current economic problems, hurting the bank then, and then he got mauled again when he was proved right for not somehow preventing it all. Our rights issue was designed to raise a war chest to enable us to survive panic withdrawals or large market upheavals, and it still would, but that's not where the threat is (worth mentioning that our share issue drove the market price down further, despite adding to the value of the company and helping to safeguard it against the current economic problems- again, the stock market punishing right action)

I think some people have the impression that the company has taken risks, been caught out, and is now paying the price- in fact that already happened, 6 months ago, now it's just paying the price for being a juicy undervalued target in a circle of sharks.

Communist? I work for a bank But isn't it ironic that it's the lack of market regulation that sets up situations like this- but the current market situation is also being used as the excuse to override some of the few marketplace protection regulations we have (monopolies and mergers commission). The fact is, we have real valuable assets being undermined by market trading. The economy's going to be hugely damaged by either outcome of this situation- with likely major job losses and also loss of market choice for consumers. All because the shares are worth less than the true value of the asset, and because there are no effective controls out there.