Banking giants' gambling threatens catastrophe for the world economy

Published on Wednesday 17 September 2008 21:21

Bill Jamieson's background piece on "The Masters of The Universe" (16 September) was very informative about the players in the unfolding US investment banking saga. However, due to an absence of hard facts from government agencies or global financial sources, we still know little about the details or size of the problems faced by the world financial industry.

The media is currently full of phrases such as credit crunch, subprime, toxic assets, market collapse, global recession, etc, but detailed analysis of these issues is sadly missing. Pundits' views, which vary from a short-term hiccup to long-term apocalypse, are generally supported more by gut feel and wishful thinking, than by facts and well argued theories.

One example is how little reference has been made to the derivative bubble – an asset class which may yet prove to be the hidden part of the iceberg that will sink the world economy.

The following stats from the International Monetary Fund at the end of 2005 provide food for thought:

US ($tn) World ($tn)

GDP 12.5 44.4

Stock markets 17.0 38.1

Debt 23.8 59.0

Bank assets 9.3 55.7

Derivatives 285.0

Figures from the Bank for International Settlements at the end of 2007 suggest traded and OTC (over-the-counter) derivatives globally are in excess of $1 quadrillion ($1,000 trillion).

No matter how one measures the size of the derivatives markets, the numbers are frightening. With no underlying asset value, the massive risks of ownership and financing of what are little more than gambling chips are being widely ignored. Lehman and AIG have problems with subprime debt, but both also have sizeable exposure to derivatives. The extent of this exposure is critical, as failure of one counter-party to a derivative contract means losses for both sides. Given the gearing in hedge funds and the huge swings in indices, rates, and currencies, quantifying the size and ownership of these losses should be an urgent priority.

DEREK BROCK

Corstorphine Road

Edinburgh

Governments around the world have been complacent about financial markets and the negative effects of globalisation. Politicians have simply looked at the so-called bright side of the equation for political expediency and short-term gain. In Britain too much emphasis has been placed on the financial side of the economy for far too many years and now we are totally dependent on 25 per cent of our output from the "city" alone. Added to this, service industries, inclusive of financial, account for more than 80 per cent of GDP. Now the chickens have come home to roost through this inept thinking by government and its advisers, who have been brainwashed by the American dream.

(DR) DAVID HILL

PO Box A60

Huddersfield, West Yorkshire

Arguably, no "new model" will revive the fortunes of HBOS (Between the Lines, 16 September). Why not "de-merge" HBOS? Then the Bank of Scotland could return to its roots, which, as we know from the recent history of Stagecoach, is of great benefit for shareholders and customers.

ELLIS THORPE

Albany Old Chapel Walk

Inverurie, Aberdeenshire

PricewaterhouseCoopers say there is no money to pay wages at the collapsed Lehman Brothers (your report, 16 September) but I bet they find enough to pay their own fees.

MALCOLM PARKIN

Gamekeepers Road

Kinnesswood, Kinross