<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published September 12, 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Anniversary of a near-death
One year from the day the financial system stared into the abyss, how the world has changed
By MICHELLE QUAH
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IN THE days following that fateful collapse of Lehman Brothers almost exactly a year ago, Mohamed El-Erian, CEO of Pacific Investment Management Co, the world's largest bond-fund manager, feared the worst. 'I remember at the end of the week calling up my wife and saying, 'Jamie, go to the ATM, go to the cash machine, and take cash out',' he told Bloomberg. 'She said, 'Why?' I said, 'I don't know whether the banks are going to open tomorrow'.'
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>SCARY SCENARIO
A newspaper ad in London on Sept 15 last year, when Lehman collapsed. Regulators sprang into action to avoid public panic.
</TD></TR></TBODY></TABLE>'The system was freezing in front of our eyes,' he said.
On the other side, Piyush Gupta, Citi's CEO for Southeast Asia, remembers doing everything to prevent a run on the bank. He told BT: 'We were really concerned because we saw a lot of people coming in, wondering if they can cash out. Now, the first rule in banking is never to let a bank run happen. Once a bank run happens, you're just dead.'
'So we worked overnight through the weekend to make sure we were adequately funded in all our branches. We didn't want a situation where a client comes in and says he wants to withdraw his cash and we don't have cash. We also took ads out in the papers and called every single customer and said 'look, you don't need to worry, we are safe and everything is going to be all right'.'
The swift demise of what was once an investment banking giant sent markets into a tailspin. It wholly destroyed confidence in the banking sector - and the financial system as a whole - and brought an already teetering economy to its knees.
Jimmy Koh, head of economics and treasury research at United Overseas Bank, (UOB) says: 'We never truly understood systemic risk (that is, the risk of collapse of an entire financial system) until the day Lehman Brothers collapsed.'
'That week was so critical - it showed us just how easily the loss of confidence in the financial system could so completely bring about its downfall,' he adds.
US policymakers acted quickly to shore up the financial sector and prevent another major collapse. To prevent mass withdrawals, then president George W Bush signed an emergency order providing government insurance to the US$3.5 trillion tied up in money market funds - which provides short-term loans for businesses worldwide to cover everyday expenses.
The European Central Bank (ECB) pumped US$42.6 billion into money markets to shore up confidence, while the Bank of England offered nearly US$9 billion in a three-day auction. Over the longer term, the US Federal Reserve doubled its balance sheet, providing twice as much lending in dollars worldwide.
And the US Treasury eventually put through a US$700 billion bailout package in the form of the Troubled Asset Relief Program (TARP), pumping almost US$300 billion into the US banking system.
In Singapore, the central bank pledged to guarantee all deposits of individual and non-bank customers in banks, finance companies and merchant banks licensed by the Monetary Authority of Singapore (MAS), until Dec 31, 2010 - backed by S$150 billion of government reserves.
One year on
The shockwaves resulting from Lehman's collapse have unquestionably altered the global financial landscape, leaving many worse off than before - from the individuals who lost their investments, to the governments (such as Iceland's) which were felled by the resulting banking crisis.
And, thanks to the various bailout programmes, the global financial system has gone into greater debt. Debt levels are now second only to what was experienced post-World War II, says Gabriel Yap, senior dealing director at DMG & Partners Securities.
'Presently, with bailout plans that reach as high as 15 per cent of GDP, the debt/GDP ratio of the top four economies are: first, the US with debt amounting to 76 per cent of GDP, at US$13.8 trillion; second, Japan, at 74 per cent of GDP, or US$5.6 trillion; third, Germany, 72 per cent of GDP, at US$3.4 trillion; and fourth, the UK, with debt at 77 per cent of GDP, at US$2.8 trillion,' Mr Yap says.
But, there are also positive effects. Many of the excesses within the financial system - which caused Lehman's collapse in the first place - are being dealt with.
'The whole system is being cleaned up,' says UOB's Mr Koh. 'Loans can't be totally securitised any longer. We've moved from complete deregulation to, possibly, a state of overregulation.'
Chua Hak Bin, director of Asia Pacific economic and market analysis at Citi, believes Lehman's collapse has taught policymakers that financial institutions need to be more tightly regulated and closely supervised.
'Regulators will probably be more mindful of the risks posed by excess leverage, off-balance sheet exposures, and soaring asset prices.
'They have learnt that financial institutions, even if their absolute size is not large, may be systemically important if their links to other financial players are significant,' he says.
The key lesson
Perhaps the key lesson is that financial markets cannot be left to regulate themselves.
Lehman was felled by the weight of about US$60 billion in toxic bad debts. It went under holding assets of US$639 billion against debts of US$613 billion. Bankers, ratings agencies and regulators were all culpable, says DMG's Mr Yap.
Professor Peter Morici at the University of Maryland, a former chief economist at the US International Trade Commission, told The Guardian: 'My feeling is we got pretty damn close to it all coming apart. The concept that the 'market will police itself' failed.'
Citi's Mr Chua says: 'We've learnt that governments and central banks worldwide can and must quickly and aggressively respond to avoid global financial crisis and depression. And central banks must be given a broader financial stability mandate, beyond price stability, and the necessary tools to respond promptly and effectively in times of crisis.'
</TD></TR></TBODY></TABLE>
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Anniversary of a near-death
One year from the day the financial system stared into the abyss, how the world has changed
By MICHELLE QUAH
<TABLE class=storyLinks border=0 cellSpacing=4 cellPadding=1 width=136 align=right><TBODY><TR class=font10><TD width=20 align=right>
</TD><TD>Email this article</TD></TR><TR class=font10><TD width=20 align=right>
</TD><TD>Print article </TD></TR><TR class=font10><TD width=20 align=right>
</TD><TD>Feedback</TD></TR></TBODY></TABLE>IN THE days following that fateful collapse of Lehman Brothers almost exactly a year ago, Mohamed El-Erian, CEO of Pacific Investment Management Co, the world's largest bond-fund manager, feared the worst. 'I remember at the end of the week calling up my wife and saying, 'Jamie, go to the ATM, go to the cash machine, and take cash out',' he told Bloomberg. 'She said, 'Why?' I said, 'I don't know whether the banks are going to open tomorrow'.'
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>SCARY SCENARIOA newspaper ad in London on Sept 15 last year, when Lehman collapsed. Regulators sprang into action to avoid public panic.
</TD></TR></TBODY></TABLE>'The system was freezing in front of our eyes,' he said.
On the other side, Piyush Gupta, Citi's CEO for Southeast Asia, remembers doing everything to prevent a run on the bank. He told BT: 'We were really concerned because we saw a lot of people coming in, wondering if they can cash out. Now, the first rule in banking is never to let a bank run happen. Once a bank run happens, you're just dead.'
'So we worked overnight through the weekend to make sure we were adequately funded in all our branches. We didn't want a situation where a client comes in and says he wants to withdraw his cash and we don't have cash. We also took ads out in the papers and called every single customer and said 'look, you don't need to worry, we are safe and everything is going to be all right'.'
The swift demise of what was once an investment banking giant sent markets into a tailspin. It wholly destroyed confidence in the banking sector - and the financial system as a whole - and brought an already teetering economy to its knees.
Jimmy Koh, head of economics and treasury research at United Overseas Bank, (UOB) says: 'We never truly understood systemic risk (that is, the risk of collapse of an entire financial system) until the day Lehman Brothers collapsed.'
'That week was so critical - it showed us just how easily the loss of confidence in the financial system could so completely bring about its downfall,' he adds.
US policymakers acted quickly to shore up the financial sector and prevent another major collapse. To prevent mass withdrawals, then president George W Bush signed an emergency order providing government insurance to the US$3.5 trillion tied up in money market funds - which provides short-term loans for businesses worldwide to cover everyday expenses.
The European Central Bank (ECB) pumped US$42.6 billion into money markets to shore up confidence, while the Bank of England offered nearly US$9 billion in a three-day auction. Over the longer term, the US Federal Reserve doubled its balance sheet, providing twice as much lending in dollars worldwide.
And the US Treasury eventually put through a US$700 billion bailout package in the form of the Troubled Asset Relief Program (TARP), pumping almost US$300 billion into the US banking system.
In Singapore, the central bank pledged to guarantee all deposits of individual and non-bank customers in banks, finance companies and merchant banks licensed by the Monetary Authority of Singapore (MAS), until Dec 31, 2010 - backed by S$150 billion of government reserves.
One year on
The shockwaves resulting from Lehman's collapse have unquestionably altered the global financial landscape, leaving many worse off than before - from the individuals who lost their investments, to the governments (such as Iceland's) which were felled by the resulting banking crisis.
And, thanks to the various bailout programmes, the global financial system has gone into greater debt. Debt levels are now second only to what was experienced post-World War II, says Gabriel Yap, senior dealing director at DMG & Partners Securities.
'Presently, with bailout plans that reach as high as 15 per cent of GDP, the debt/GDP ratio of the top four economies are: first, the US with debt amounting to 76 per cent of GDP, at US$13.8 trillion; second, Japan, at 74 per cent of GDP, or US$5.6 trillion; third, Germany, 72 per cent of GDP, at US$3.4 trillion; and fourth, the UK, with debt at 77 per cent of GDP, at US$2.8 trillion,' Mr Yap says.
But, there are also positive effects. Many of the excesses within the financial system - which caused Lehman's collapse in the first place - are being dealt with.
'The whole system is being cleaned up,' says UOB's Mr Koh. 'Loans can't be totally securitised any longer. We've moved from complete deregulation to, possibly, a state of overregulation.'
Chua Hak Bin, director of Asia Pacific economic and market analysis at Citi, believes Lehman's collapse has taught policymakers that financial institutions need to be more tightly regulated and closely supervised.
'Regulators will probably be more mindful of the risks posed by excess leverage, off-balance sheet exposures, and soaring asset prices.
'They have learnt that financial institutions, even if their absolute size is not large, may be systemically important if their links to other financial players are significant,' he says.
The key lesson
Perhaps the key lesson is that financial markets cannot be left to regulate themselves.
Lehman was felled by the weight of about US$60 billion in toxic bad debts. It went under holding assets of US$639 billion against debts of US$613 billion. Bankers, ratings agencies and regulators were all culpable, says DMG's Mr Yap.
Professor Peter Morici at the University of Maryland, a former chief economist at the US International Trade Commission, told The Guardian: 'My feeling is we got pretty damn close to it all coming apart. The concept that the 'market will police itself' failed.'
Citi's Mr Chua says: 'We've learnt that governments and central banks worldwide can and must quickly and aggressively respond to avoid global financial crisis and depression. And central banks must be given a broader financial stability mandate, beyond price stability, and the necessary tools to respond promptly and effectively in times of crisis.'
</TD></TR></TBODY></TABLE>
