Lehman collapse means all bets for the financial system are now off

Sep.15, 2008 in Investment Opinions

By Philip Aldrick, Banking Editor
Last Updated: 1:03pm BST 15/09/2008

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Any bank harbouring hopes of an end to the credit crunch had a rude awakening today.

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Lehman Brothers’ bankruptcy has dealt the money markets another crippling blow, incapacitating them for who knows how long. Since the crunch struck last year, the markets have been in seizure. But, with the careful nursing by governments and central banks, they appeared to be on the slow road to recovery. No longer.

Fears about other banks’ exposures to Lehman and renewed uncertainty as to where the crisis may strike next will freeze the wholesale markets up again. The crunch is back with a vengeance.

It’s not hard to see why. Lehman’s collapse into bankruptcy protection is the biggest corporate debt default in history and, in the complex interwoven world of modern banking, no one properly understands where the risks lie.

Wall Street’s titans gathered on Sunday afternoon to start the process of working out their positions by sitting down with other banks and tracking the paths of these impenetrable credit structures. It will take months at the very least for them to establish their “naked” exposure.
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Establishing those positions is vital. Last week, for example, David Wright, deputy head of the European Commission internal market unit, noted that regulators still didn’t know the full size of global securitised product issuance.

“We have to believe the numbers, ” he said. “If we can’t, we can’t restore confidence.” Without confidence, banks will not secure wholesale market funding. As the largest user of the wholesale markets in the UK, HBOS’ 30pc share price fall on the London Stock Exchange this morning appeared to reflect those concerns.

What little confidence the markets had restored in recent months has been knocked for six. According to experts, Lehman has $150bn of debt outstanding. By comparison, US telecoms group WorldCom - the largest debt default until today - had $23bn to $30bn (depending on whose estimates you use) when it went bust in 2002.

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