This does of course underline quite how seriously they regard the situation and thus it is not a subject which we can just brush under the carpet and ignore just because it’s Christmas.
In fact being both Christmas and the end of the year are both important factors in this drama.
The central bankers have quite rightly focused on the issue of liquidity, which is a key element to the successful operation of a capitalist economy. However, actions just to try and stem the rise of the wholesale interbank market rates may not be quite the perfect antidote that some have been seeking so desperately.
The bankers’ actions have had some impact as we can see from the rates pulling back somewhat, but the deeper problem lies in the question of confidence. It is the lack of such confidence that will be the key issue for 2008. It does not seem to be so much that the banks don’t trust each other (although there must be a certain amount of this amongst the smaller players) but rather that banks are loathed to extend facilities in nervous times in case of unforeseen eventualities which could occur at any time – such as further unexpected losses with counterparties, demands on their own funds, asset and collateral valuations (such as property) – oh yes and “sod’s law” as well!
Thus the broader picture amongst the banks is one of considerable damage to their balance sheets which will mean that there are going to be some difficult decisions by the banking leaders in order to effect the necessary repairs. What a financial mire – mind you it may be more appropriate to talk of myrrh because of its use and application in the embalming process – suitable for certain bankers no doubt.
The first casualties, as we have already seen, have been some chief executives who have either fallen on their swords or had them neatly inserted for them. Citibank, Merrill Lynch and Bear Stearns have gone through this process, but this merely puts us at the “sacrificial lamb” stage. The next stage has been to find the direct bail out monies and much of this has come from the Orient and the Middle East providing much needed succour for the likes of UBS, Citibank and Morgan Stanley. The one notable exception to this has been Goldman Sachs who not only have had the audacity to show improved results, but have avoided any need for a search for support monies.
The next stage from this then is how the banks address future business. Some will be looking to attract new money by offering better deposit rates, others will be looking to possible rights and bond issues, and this comes down to what our Chief Investment Officer, Ros Price always points out is a four letter word – not maybe so rude but just as dangerous – risk. A year ago the pompous investment bankers thought that their complex mathematical models removed their risk and passed it on to others – a giant game of pass the parcel – but then the music stopped. They were far too complacent of their running of risk; now they are frightened of running any risk. Until this attitude slowly changes, the lifeblood of capitalism with be constricted, and thus the potential growth of the effected economies constrained.
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I am sorry to not be writing an overly positive note for Christmas, but we are living in an unpleasant period of financial instability which will figure significantly throughout 2008. For investors we must all remember to take a longer view of investments so that your money is not dependent on one “pogo stick” and broadly spread internationally and especially outside Sterling.
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And finally…..it’s good to be able to report some effective actions by the European police clamping down on heinous crimes. Firstly Greek traffic police have threatened a parrot with court action for an illegally parked perch (bet it had a dodgy indicator as well). Secondly this has been followed up by the Italian anti-corruption police who have apparently arrested traffic officers in a swoop on a mozzarella extortion ring. Drivers apparently had been forced to hand over cheese or suffer on the spot fines. How much for a lump of old cheddar I wonder?
Have a very happy Christmas and a jolly good holiday – we may need it!
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited