Tuesday, March 18, 2008

And the banks came tumbling after.

So first National Rock and now Bear Stearns. I tuned in to the ITV national news at 6pm to learn more about what some reports are stating could be the worst since World War II. Of course first I had to sit through the much more important stories of the Mills-McCartney divorce and Shannon's family celebrations. Then good old ITV boiled it down to 'bank collapse, shares falling, don't panic' while showing us the trading boards lighting up in red.

So what's going on? Well I've already discussed the sub-prime events and this is yet more backwash from that. Basically the sub-prime crash hit Bear Stearns' hedge funds (no don't bother asking what a hedge fund is) pretty much making them valueless. All the other institutions who have been stockpiling money (because they know even nastier is to come) got antsy and called in their markers; that is every lender and every marker - at the same time. Unsurprisingly this fouled things up to the point where the Federal Reserve stepped in along with JP Morgan Chase to take it over.

This in turn created worry over the liquidity of other banks so investors ditched their shares in droves to sink their money into something more stable, which is why as a result gold prices risen. Ironically banks and other financial institutions that would have been fine have now had their share price reduced meaning they might not be as stable as they would have been if everyone hadn't panicked.

Over here the Bank of England has loaned out £5bn to the banking sector in order to stabilise the market and to encourage lending once again. Except, as I've mentioned, the banks are building up a cash reserve and these loans are most likely destined to sit in this cushion and not be loaned out in return.

So all in all the banks still don't want to lend out money, are still quick to pounce on weakness in a desperate bid to get something out of any upcoming fall, and all that without us even hitting the big problems that are looming on the horizon.

But hey £24m for Heather Mills and £35k a year for their kid that's the important thing to focus on.


Anonymous said...

It's the golden age for the FX traders and spread-betters who can make a killing in falling markets.

Anonymous said...

I wonder - what is a “market”, what are “stocks” and “shares”, what does “liquidity” actually mean, and several other questions…

Hmm, maybe if I pester the flipper enough I may get some answers. :-) Enquiring minds want to know!

FlipC said...

A market is... well a market, a place that people can sell lots of different goods; a food market sells lots of different foods and a stock market sells lots of different stocks.

Stocks and shares: You can own a share in the stock of a company, think of it as the profit of a company of which you get a percentage share. It can get confusing because individuals can refer to their own 'stock' meaning all the shares in various companies they own.

Liquidity: In this context it refers to the ability to get your money out easily; or not as the case may be.

Any others?

Anonymous said...

Why do we have records of the price of cotton going back several millennia? And why do the prices over time exhibit both apparent nondeterminism and scale-invariant self-similarity of a fractal character?

FlipC said...


Because within this fixed system the same conditions crop up from time to time. Simplifying things history repeats and people tend to react in the same way, however it's not normally possible to predict when a repetition will occur. Hence its non-deterministic self-similar nature.

We've just had a good example with HBOS. Bear Stearns falls over and everyone gets jittery. Suddenly rumours fly that HBOS is in emergency talks, with the result that everyone starts dumping that stock.

In this instance it is believed the rumours were intentionally started with this being deemed the most probable outcome. Those in the know sold HBOS stock prior to the rumours being started, the price falls and they then buy the amount they sold at a reduced price and make a profit (selling short).