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Stock markets are having a bad time, and London's FTSE 100 index of leading shares has been particularly hard hit because it is heavily weighted towards financial stocks and natural resources.
We know why banking stocks are bombed out, but resource stocks are now also taking a caning because a global slowdown means reduced demand for raw materials. While there are still some analysts who maintain that we are in a 20-year commodity super-cycle, there are more who have come round to the view that the commodity boom was just another case of irrational exuberance.
But it seems bizarre to conclude simply because markets are falling that insurance companies are in trouble. Last week, however, the air was thick with stories of how, with each fall in share prices, their capital position was becoming more constrained, and before too long they would be tapping shareholders with rights issues to raise money.
But given that almost no one can understand the published balance sheets of insurance companies, it seems odd that all those selling the shares could be so certain.
The capital requirements of such businesses depend on so many different things the kind of business written, the equity and bond mix in the investment portfolio, the level of interest rates, the amount of shareholder funds, the volume and nature of the new business coming in, the nature of the inherited estate and much more besides that only the people on the inside can have any realistic idea of what the true capital position is.
Suffice it to say, therefore, that even in 2003 when the market was lower than it is now, most insurers had an adequate capital position and they are all a lot more comfortable now than they were then.
City is loser in action on Iceland
One of the great strengths of the City since its earliest times has been its independence from Government. It may be only a couple of miles from Guildhall to Whitehall but it might as well have been an ocean for the gulf in attitudes between the two centres of power.
There were good reasons for the detachment. The bankers in the City were there to lend money, but successful lending depends or certainly used to depend on stable long-term relationships and trust between borrower and lender.
From the earliest Victorian times, when their overseas customers saw inconsistency in Westminster they could match it against consistency in the City and take heart from the fact that their banking relationships were safe. The bankers would not be easily deflected by the whims of politicians.
This image of the independence of the City was maintained throughout the turmoil of World Wars and the Cold War and was very much in evidence with the release of the American hostages held by revolutionary Iran in 1980 which is relatively recent history even if it does not always feel like it.
Resolving that crisis meant finding someone trusted by the Iranian revolutionaries, the American government and the Algerian intermediaries. The British Government failed the test but the City did not.
It was the Bank of England's then Deputy Governor, Sir Kit McMahon, who did more than anyone to arrange the transfer of frozen Iranian assets from the US to Iran and hostages simultaneously moving in the other direction which brought the crisis to a close.
This deep level of trust has helped the City become the international financial centre it is. And it is this trust that may yet become a lasting casualty of the current financial crisis, not because of the behaviour of individual banks but because of the behaviour of the British Government. By and large, Gordon Brown and his team have had a "good war" once it dawned on them that they really did have a crisis on their hands that needed serious remedial action. The one exception to this was their treatment of Iceland.
The decision to mobilise anti-terrorist legislation to freeze Icelandic assets in the UK was little short of shameful. The Government used powers in a way it was never intended they should be used against a target that it should have been looking to find ways to support, not kick when it was down.
This was done presumably so that Brown could appear to be acting tough in the eyes of British voters, but the casual disregard for the consequences of the action on that small nation leave a very bad taste. And, inevitably, all the other customers of the City around the world will never look at London's financial markets in quite the same way again.
The City's image of independence has been compromised for all to see. It will never be as easy to trust again.
Reader views (7)
Can Anthony please refer me to (the date of) his article where he pointed out the subtleties of dashing into the bear market. The stats. showed that that there was only a short (10 day?) window where there were sharp rises and that there could aswell be sharp falls. Thanks.
- David Levene, London
Well said. Did the actions of HMG against the Icelandic banks devalue their assets unnecessarily and thereby decrease the chances of its creditors to ultimately retrieve their money? Same would apply to the average saving account owner!
Another unresolved concern is regarding possible legal liability of HMG in the case of Kaupthing. What will the price of Mr. Browns and Mr. Darlings recklessness be? No matter the amount, the bill will be sent to the UK taxpayers.
Add to all of this the important international status of the described in Mr. Hiltons article, is it possible that grave and costly errors may have been made at Downing St. 10?
- Gangleri, Reykjavik, Iceland
I think I can say that Icelanders are in general frightfully sorry for the universal credit crunch and their contribution to it. But Icelanders are astonished that anti-terrorist laws were used by Britain to freeze assets in the UK. Assets are still frozen, no bank transfers available. And further it seems the British Government is more interested in finding short term scapegoats for the credit crunch than to solve it. Maybe for political reasons or maybe for the past Cod Wars?
Actions of Mr Brown and Mr Darling brought Kaupting Bank down, leading to major losses for the British public, communities and for Icelanders. The case is being brought to British courts now. But then the Icelandic public lost more then the British.
There is no doubt that Icelandic politicians didn't foresee the complications of the Icelandic banking system, neither did the European nor the British. But still the European legislation were adhered to. But apparently the Icelandic banking minister had no or little knowledge of banking, but the same applies to many other ministers in the neighbouring countries.
We may find many to blame, but our mutual goal must be to minimise the losses. We must hope that politicians will find able experts to solve this crises and minimise the loss.
What I'm amazed by a European bank with open loan lines to Kaupting made a bet on the collapse of Kaupting with Primus Guarantis of Bermuda for $68.2. Strange or not? But then they won, and many lost.
- F.T. Magnusson, Reykjavík, Iceland.
I'm glad to see that people of UK are being told the true nature of the act of PM Brown. This is nothing but a bad political stunt. The consequences of his action is that Icelandic banks are now unable to protect their assets in UK, f.ex. appr. 2 billion pound loans to Baugur Group are loosing value every day since it is impossible to help the company's owned by Baugur to stay in business.
So if the actions taken by the British government means that the bank will lose more money doesn't it mean that British people will get less of there money back? Is that not the opposite of what Brown was supposed to do?
- Gudni Einarsson, Reykjavik, Iceland.
Mr. Hilton. Thank you for pointing out this terrible crime Gordon Brown committed against Iceland, which Icelanders will NEVER forgive. The Icelandic government has NEVER intended not honouring Iceland´s international obligations, NEVER. So what your PM did was based on a pure lie to grace himself. Landsbanki owned IceSave, but Kaupthing, Iceland´s biggest company had nothing to do with it. Nevertheless Mr.Clown closed that London based bank causing it to crash, leaving the Icelandic nation with no international trust in the banking community, leaving the nation stranded.
We are only 320,000 and have very little means to defend ourselves from such a terrible act. Icelandic university students and Icelandic tourists, all around the world, have had to experience real prejudice because of the British.
I am surprised how little the British press as indeed investigated this terrible act and how one-sited its coverage really is.
So thank you again for being so professional.
- Karlsson, Reykjavik, Iceland.
You are spot on, Mr. Hilton. An abuse of the anti-terrorist legislation, for short term political gains, has landed Iceland with long term damage. Moreover, foreign owners of UK registered Banks, such as Singer and Friedlander used to be before confiscation, must be preparing escape from the City and the UK.
- Páll Ásgrímsson, Reykjavík, Iceland.
I´d like to thank you for this article Mr Hilton.
For your readers, I know that Iceland has lost it´s credibility but please bear in mind that it was only a few high flying bankers that caused this financial crises, not the Icelandic nation. Mr Brown has stamped us as terrorists and by doing that he brought down the biggest company in our country and the domino effects are still emerging.
Our economy is down the drain and a heavy burden is laid on me and my children to pay off the debts that the banks landed us in and I will do my share to do so but one thing I´d like to be clear:
I am an Icelander and proud of it and we´re no terrorists!
- Arnar, Reykjavik, ICELAND.
