8/19/07

Title of Article: Banks in dark over final cost of credit turmoil
Source: Financial Times (8/19/07)

As we all know, there was a recent financial meltdown within the UK. This article discussed the problems banks now face because of the meltdown. All in all, bank companies are not exactly sure what the damage will be in the coming weeks; they really don't even know what the damage is to date. However, they do know that a big problem is lurking: they are unable to sell their leveraged loans, which means that they might have to mark them down; something they do not want to do, but, if forced, may have to.

According to analyst Howard Mason, the big bank company Citigroup could face up to 20% or 1.5 billion dollars in loses at the end of the quarter; however, Citigroup plans to cushion their huge loss by lowering staff pay. This, in my opinion, could cause tremendous problems. With lower pay, employees will most likely go on strike and create even more turmoil for the bank. A better, more efficient solution to their debt problems needs to be conjured up in order to avoid the impending doom Citigroup will face.

The worst performer over the past month has been Lehman Brothers as their shares have decreased 26%. This may or may not be the case in the coming weeks as sector share prices for all banks are likely to keep fluctuating for quite some time. Only time will tell what will happen to these big bank groups; who will end up on top...and on the bottom.

Since this article was about the turmoil banks may face due to the meltdown, I was puzzled when I came across this statement: "Bear Stearns jumped 13% and Lehman Brothers rose 6%." I don't know if I don't understand this because I have no background in Economics, but why would bank percentages increase at a time of financial turmoil? Also, the article mentioned that Lehman Brothers was the worst performer over the past month so how could their percentage rise? This is something I will definitely need to bring up with you, Professor Shackleford. Maybe you could tell me exactly what this percentage is and what it means for these bank companies.

Overall, I believe all banks will come out of this mess just fine, as long as they don't cause more problems by lowering staff pay or doing anything else of the sort (i.e. Citigroup). Banks can always borrow the money they need from the Fed, get out of debt, and return back to normal functioning. Unless another catastrophic event occurs, I believe we will be reading about the bounce-back banks will be going through in the next few weeks.