Layoffs in the City will hit "Main St" Thursday, October 02, 2008

City of LondonImage via WikipediaMany conversations I've had in recent days with friends/colleagues that have links to the City have included reference to cutbacks individuals/families are looking at making in their discretionary spending.

These changes are going to be fairly immediate as people seek to conserve cash. Examples provided to me included
Whilst these may strike many as indulgences that those people were lucky to have enjoyed for so long given the hardships many families face, they are notable because they will have a direct impact on local businesses and employment. It seems inevitable that some businesses will close as a consequence.

This is on top of the effects from the dramatic slowdown in the housing market that will directly hit not only estate agents, but also removal companies, painters & decorators, interior furnishing stores [curtains, furniture, carpets] and solicitors.
Reblog this post [with Zemanta]I've also learnt from friends in the Charity sectors that bookings for forthcoming Charity dinners in the run-up to Christmas are considerably down, with expectations for fund raising efforts also diminishing as people cut back. City workers have been a significant source of diners at such events, as well as contributors.

The effects of the dramatic events in the City are going to ripple out quickly and powerfully - be warned.

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posted by John Wilson @ 12:33 PM Permanent Link ,

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MF Global battered by storms. Monday, March 17, 2008

As I suggested last week here, firms like MF Global, where I used to work, were certain to fall under suspicion that they too would be encountering difficulties in the current climate. Today, the firm lost as much as 80 per cent of its value on rumours of financial difficulties. This comes on top of the falls resulting from a loss of $141m attributable to unauthorised trading in February.

At 27 Feb 2008, the shares were trading at $29.24 and today went as low as $3.64.

One of the few large brokers not to be owned by a bank, MF Global intermediates between its' customers and the Exchanges. As a generality, the firm does not take proprietary positions, but does remain exposed to counterparty and liquidity risk in these turbulent times.

As a major player, MF Global's client base will be split between those with long open interest positions and those with short i.e. some clients will be losing money in the market, but others will be profiting. The key challenge is therefore to manage the cash flows between the various parties, as I well recall from my role as Director of Treasury for the firm.

Exchanges can demand intra-day margin calls which have to be settled immediately - failure to so do can result in the firm being suspended from further trading until their balance falls back within headroom or calls have been settled. The consequences of this are so material that an Exchange will always be the first priority in allocating cash, assuming stock collateral isn't readily available. Often stock collateral cannot be moved sufficiently quickly to meet calls or the right "type" is not on hand.

Profiting clients may demand immediate repayment of their funds, especially if they have any concerns about the Broker. Conversely clients losing money may be slower in settling losses, despite intra-day calls being made on them. It is this timing difference between inflows and outflows has to be funded either from internal cash resources or from bank borrowings e.g. MF Global issued a statement it had a committed and used credit line of $1.4bn. In addition, it also denied claims that Joe Lewis, the investor who lost $1.16bn on his stake in Bear Stearns, was a client - the implication of the rumour being his broker would face substantial losses on his account.

Sadly, any doubts about the ability of a broker or its customers to settle margin calls, will normally prompt a "run" on the firm, regardless of the facts, even from segregated customers whose funds are held separately from the bank accounts of the company [albeit segregation in practice in the market has some notable weakness in terms of timing differences i.e. you segregate cash today in respect of the balances as at last night.

MF Global was not alone in being affected. Lehman was down 34% and ICAP 16%. Unfortunately, as it was hit hardest so MF Global has captured all the financial headlines which will exacerbate worries amongst clients. Moreover the wording of company statements that it "is very well capitalised" and has "sufficient funding to conduct our business in normal course" will not allay fears - if you'd noticed, Bear Stearns was well capitalised and these are not normal markets.

Unsurprisingly, other firms are seeking to disassociate themselves from any connection with MF Global eg Penson Worldwide which only adds to the gloom and fear.

Client/counterparty reaction in the coming days will determine the fate of the firm. As is the case for almost every firm, if these groups panic and pull funds in size, then MF Global will collapse - the firm is not in the category of "too big to fail" despite its chunky portion of business on derivatives exchanges, notwithstanding that the Exchanges and regulators would certainly try to organise an orderly transfer of business.

UPDATE: And now a class action is being launched against MF Global on behalf of investors as a result of the unauthorised trading loss, according to CNN.

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Be afraid, be very afraid - this baby's gonna blow.

In Hollywood catastrophe movies, it's often only the heroes that are privy to the news that the earth is about to explode or that a new ice age is starting tomorrow.

The banking crisis is headline news and whilst the earth isn't going to explode, economic conditions are rapidly worsening. Banks are refusing to lend to each other, even overnight, at the moment and central banks are becoming pivotal players in the markets, almost acting as central counterparty in an effort to dampen the havoc.

Do most people understand the gravity of the situation - I doubt it and for understandable reasons. After all, to most people the banking system somehow just works and provided you can get a mortgage and use your ATM card, what else is there to know? Sadly, the fear in the banking community is going to hit everyone. Here's some examples of how
Alan Greenspan, who was the revered Chairman of the US Federal Reserve Bank until his recent retirement has today described the current crisis as the worst since the WWII and considerably worse than the Japanese Banking crisis of the 1990s given its' global reach.

The shock-waves from this crisis will reverberate widely and not be contained within the banking sector. Be warned.

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We're bankers, not shopkeepers (unfortunately) Friday, March 14, 2008

It was a well-worn quote of scorn that Britain was a nation of shopkeepers.

The Wall Street Journal has now corrected the record, “No large country is more dependent on the movement of foreign money through its banks: some $2.4 trillion flowed in and out of the UK in 2006, an amount equivalent to the country’s entire annual economic output”. It goes onto highlight that “the financial sector accounts for more than one-fifth of all UK jobs”. The comparable figure from the US, home to the subprime crisis is just 6%.

So when the UK Chancellor suggests we will avoid a recession despite facing a global banking and credit crisis, I wonder what happy pills he is taking.

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