Lehmans Bros - Should we be scared?

Lehman Bros was the world's 4th largest investment bank with liabilities running into hundreds of billions of dollars - it's demise is the single largest corporate bankruptcy in US history. Alan Greenspan has said this is 'a once in a 50 or 100 year occurrence' and has 'outstripped anything he has seen before' and 'has a way to go yet'. George Bush calls it 'an adjustment', Brown's spokesperson said 'The UK is better placed to handle this situation.'

It was announced today that UK inflation rose to 4.7% in August, the highest in 11 years, on the day that a single London employer laid off 4,000 staff without notice or money.

A Tale of Greed, Incompetence and Good Time Government

Lehman Bros had an average salary bill per person of $332,000 and this year paid out more than $4bn in employee bonuses despite racking up one of the largest losses in corporate history. In August, the credit rating agency S&P rated Lehman Bros A+; can you believe that?

While Bush describes the 'adjustment' as dealing with the 'excesses' of banks in recent times, there is zero doubt from people like Paulson and Darling that the root of the problem lies in the housing markets of the US and UK. Darling himself controversially claimed this was the worst financial crisis in 60 years.

So why did Governments allow this situation to happen?

As the housing market boomed to the tune of 160% in the last 10 years in the UK, Governments watched over as lender after lender battled to give away more money, more cheaply and less secured than ever in history. Deregulation of banks allowed each company to go into increasingly risky investment vehicles and offer them repackaged to customers.

At every point Governments could have stepped in to slowdown the growth. But the lure of higher taxes to fund Government spending meant that over 1 in 4 jobs in the UK is now in the Public Sector - it's bureaucracy for the sake of it. A foreign worker influx has created a time bomb as the the Unemployment Figures are forecast to rise to over 2m in the next few years, so the strain of an extra 1m extra immigrants per year on the Welfare State will break us. Just don't ask about the whole in your pension money. And all this while kids die on the streets.

Here is The Rub

As we are told Britain can manage this better, the fallout begins. A major financial services network has issued notes to its IFAs today detailing that investors who bought 'Structured Products' in things which had descriptions like 'Guaranteed Income' in their name and are linked to a Lehmans Bros subsidiary (which is not in liquidation so no protection from any authority of Government) in the UK which distributes these products which were in fact linked to derivatives, are warning that investors can expect lower returns and in worst case lose their investments in their entirety.

You see, we are inextricably linked by the fact as consumers we buy into the derivative and exotic products that banks have produced - they just sound like protected income or secure growth or guaranteed returns to make us buy them. If we had known the risk, for the wafer thin extra return on offer we could have put it into the Building Society. Ultimately, as the US Treasury has not guaranteed the investment base of Lehmans Bros and the FSA in the UK has not backed the Lehmans Bros Distributor/subsidiary, these investments may be totally lost.

Now Do We Get It

So when everyone talks of corrections, slowdowns, credit crunches and tries to down play the effect of a catastrophe of the magnitude of Lehmans Bros, it is because the fragile financial system hangs on a knife edge. The exposure of banks to these products is immense - the total derivative-based market is said to have over $900 trillion in outstanding positions.

It is a pack of cards just waiting for the waft of a door shutting to collapse.

Bear Stearns and Lehman Bros have fallen, AIG's future hangs in the balance, Merrill Lynch has been gobbled up - these are not two-bit alley shops knocking out junk bonds these are the pillars of the US financial system; the bastions of corporate America. In the UK HBOS shares dropped by 17% as the UK's largest mortgage provider became the panicked focus of the sheep who run the computers in the financial market - the very people who benefited from the extraordinary boom period of the last 10 years.

Vote With Your Pocket

At the next elections in the UK and US, many voters will be significantly worse off financially, some may have vast portions of their savings literally worth nothing and even may be sitting on negative equity or worse having had their home prepossessed.

We are in the confluence of slowing economies, rising inflation, two major wars, a credit crunch, corporate failings. management incompetence, Government incompetence, the rise of the committed fanatical and the threat of a renewed Cold War.

This is not an adjustment - this is the consequence of monumental hubris, greed and mismanagement.