The Greatest Banking Crisis of our Generation
By now, it is obvious to all but the most myopic that the United States and therefore the rest of the world is in the midst of the greatest banking crisis of our generation and probably since the Second World War. The London Interbank Offered Rate (LIBOR) for overnight deposits shot up last night on both sides of the Atlantic on the news of Lehman Brothers demise, to rates that have not been seen since 2001. The LIBOR overnight rate is perhaps the best measure of the level of inter-bank trust and assessment of risk. Reuters reported this morning:
“The sense of crisis engulfing interbank money markets deepened on Tuesday as the cost of borrowing overnight dollars surged above 10 percent, indicating that money markets had frozen and counterparty trust broken down completely.
As the fallout from Lehman Brothers' collapse at the weekend continued to infect financial markets, the interest rate banks demanded for lending dollars overnight to other institutions ballooned to more than five times the U.S. Federal Reserve's 2 percent target rate.”
Click here to view the rather sobering graphic of the LIBOR overnight rate since 2000.
Within a matter of months, three of the “Big 5” independent Wall Street merchant banks have collapsed. Other banks are de-leveraging at a brutal pace. So far, the global banking industry has written off half a trillion dollars. The IMF has estimated the full extent of the global bad debt at some $1 trillion, including at non-banks and Nouriel Roubini, an economics professor at New York University, has been talking of an ultimately $2 trillion size problem. Alan Greenspan said just last week that “there’s no question that this in the process of outstripping anything I’ve seen and it still is not resolved and still has a way to go and, indeed, it will continue to be a corrosive force until the price of homes in the United States stabilizes.”
At what level will the price of homes stabilize? The optimists seem to hover around 30% below the peak that they achieved. The pessimists …..
This means that anybody that was more than 30% leveraged on their mortgage at the peak now owes their bank more than their house is worth. Given their increasing appetite for short term debt over the past two decades this in turn means, by irrefutable logic, that many middle class Americans are personally bankrupt. Including, quite conceivably, many of your colleagues. Given that most knowledge intensive enterprises like law and other professional service firms rely on the personal creditworthiness of their owners to secure their corporate lines of credit, this means that many such firms are either already in or are about to find themselves in dire financial straits, too.
If you have not yet switched the focus of your strategy to creating contingencies to deal with the very serious possibility of survival under the worst possible economic scenarios, then do so now. Do not delay.
1. Make sure that you have jettisoned all non-essential costs (but not the essential ones)
2. Make sure that you are getting accurate and objective information from the market .... keep especially close to your key clients
3. Make sure that you have a plan based on the "What If?" scenarios that you have identified might emerge
4. Keep your eyes peeled for opportunities as well as threats to be warded off
5. Unless absolutely unavoidable, stay true to your core strategic intent
This time will pass. Right now, a clear mind and strong leadership are absolutely essential.