Credit crunch or something else?

It’s been a while since I last wrote and lots of people have been asking what I think of the financial turmoil happening this week. So this seemed like an opportune moment to restart my blog.

I’m no expert but it seems to me that this entire mess was caused because people and businesses that should never have got credit, got credit and that’s always a bad thing. Years ago, you built a relationship with a bank, they got to know you, you had a track record (as an individual or as a business), and then they lent you money if they thought there was a very high chance they would get it back (bankers of old were a conservative bunch).

Then things changed, debts were given all sorts of funny names (CDOs, SIVs and many others), insured (hence the AIG problems), and were sold from bank to bank. The original lending bank wasn’t that bothered if you could repay or not because they were going to offload it to someone else anyway, usually another bank; and it was insured anyway! Then it all crashed, defaults increased and suddenly no one knew how much their “assets” in the form of CDOs and SIV’s were worth. Banks stopped lending to each other and almost no bank could work out what their exposure was. Just last week an anonymous Lehman’s executive said they didn’t know if their exposure for $40bn or $80bn; that’s quite a spread ($40bn is more than the annual GDP of many small countries)!

The result is that bank stocks are shot, even the very largest are down 30% or more from their highs but what’s all this got to do with globalization?

Well guess what? Guess who’s propping up the stock prices of the major banks? The answer is the sovereign wealth funds of China, Middle Eastern States, Russia, India and many others are building up significant stakes in the world’s largest banks; while we’re selling, they’re buying. These guys know that BofA, HSBC, Citibank, Barclays, Santander etc are not going down. They’re way too big, for example HSBC has a valuation today of $188bn and a p/e ratio of 9.6; and despite everything and all the rumour they’re too well run. There’s nothing wrong with these banks. I truly believe that we will emerge from this period with the biggest banks in the world owned by funds from the Middle East and emerging countries and that is going to change everything.

Ultimately, managers do what their shareholders encourage them to do. If the shareholders are from Governments from Dubai, Abu Dhabi, China, India and Russia, they are going to be putting serious pressure on to divert funds from “traditional” markets to support their domestic agendas. That means more money for Indian, Chinese and Russian companies, and less for US and European companies.

In all the noise of the last few weeks and particularly the last few days, I really think this major point has been missed. The result will ultimately be even faster development of those economies, fuelled by the banking behemoths. I will bet that when we look back on this period in 20 years time, it’s not the banking crisis that will be talked about; it will be remembered as the point at which the balance of power tipped irreversibly eastwards.