Collateral damage from Lehman collapse suggests bailouts aren’t so bad


This time a decade ago, Wall Street and the City were in the first throes of a crisis that would be triggered by the bankruptcy of Lehman Brothers.

The cost to the global economy in terms of lost output, falling living standards and financial bailouts has been immeasurable.

Ten years on, the remnants of the catastrophe are still with us in the shape of super-low interest rates, outsized central bank balance sheets and the still wobbling European banking system – especially in Italy and Greece.

Sell-off: This time a decade ago we were in the first throes of a crisis that would be triggered by the bankruptcy of Lehman Brothers

Sell-off: This time a decade ago we were in the first throes of a crisis that would be triggered by the bankruptcy of Lehman Brothers

Remarkably, though, the hedge funds and investors that bought Lehman debt and securities at the time of the collapse are now enjoying a payday. Indeed, Lehman joins a select group of financial institutions that went into run-off (were closed down) but eventually found themselves able to pay back financial creditors.

Here in Britain, patience eventually paid off for depositors with the Bank of Credit & Commerce International (BCCI) which was closed down by the Bank of England in July 1991. Assiduous work by the liquidators eventually led to almost 100p in the pound being recovered by creditors, many of which were Pakistani-owned businesses as well as local authorities.

More recently, there have been cheering developments at Equitable Life, with chief executive Chris Wiscarson arranging a takeover by Reliance Life. The deal will release £1.8 billion of capital to be shared among the remaining 300,000 policyholders of the collapsed firm.

It has taken almost two decades for a wrong to be largely made right, and many people suffered grievous uncertainty or have died before a final settlement was reached. But carefully managed run-offs can have decent outcomes.

Which brings us to Lehman. This week a number of financial investors that bought Lehman debt at knockdown prices, including Elliott, Carval and Baupost, will receive a payout of £5 billion. Remarkably this brings the total of sums paid by administrators PwC to Lehman creditors to £42 billion.

Indeed, the process has been so thorough that a surplus of £2 billion has been generated which will be released in the future to the Lehman Brothers estate in the US. People who bought debt trading at 25p in the pound will have received 140p of returns.

Resolving the balance sheets of complex financial groups is hugely complex and time consuming. The scale of the payout suggests Lehman’s problem was one of liquidity rather than insolvency. It may cause regulators to ponder whether ending ‘too big to fail’ is really wise.

The enormous collateral damage from allowing Lehman to collapse could suggest that bailouts aren’t so bad after all.

Low flying

Ryanair isn’t quite the money-making machine it used to be.

Its big competitive advantage is low costs. But bolshie pilots fed up with temporary contracts, the pressure of fast turnarounds and low pay have cut up rough and are on a trajectory for a 20 per cent pay hike.

Add to this the pressure from higher fuel bills, and profits took a big hit in the first quarter. Next worry identified by chief executive Michael O’Leary is Brexit. He claims that the one-fifth of the company’s investors based in Britain may lose their voting rights if there is a no-deal Brexit.

It might also result in interruption of EU rules that allow planes to fly unimpeded throughout the EU.

He may be right, but curious that British Airways owner IAG and EasyJet, both of which have larger UK investor bases, are not making the same obscure point.

Tech return

A couple of years ago Marks & Spencer’s then chief executive, Marc Bolland, gave me a tour of the retailer’s technology lab, where dozens of young enthusiasts were working on a host of new ideas for embracing the digital age.

Among the proposed innovations was using Google technology to navigate stores, linking clothing items to Apple devices and radical new payment systems.

Much of this seems to have been abolished in cost-cutting by successor Steve Rowe. His answer is to farm-out tech by partnering with Founders Factory, which is described as ‘world class digital partner’.

Linking with serial online entrepreneur Brent Hoberman may seem a bright idea. But in joining the digital economy once again, M&S seems intent on re-inventing the wheel.

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