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One reason why everyone is so gloomy is not that the economy is heading into recession, because in many ways people feel such a slowdown is long overdue and will provide a necessary cleansing. What really worries them is that, because so many of the banks have blown themselves up, they will be in no position to support companies through the coming hard times. As a result things will be so much worse than they would otherwise be, and there will be far more casualties in the corporate sector than there deserve to be.
This view is so widespread it deserves to be challenged, and yesterday Leigh Skene of Lombard Street Research did just that. In a special report on the unfolding of the credit crunch and the distress of the banks, Skene made the often-overlooked point that the worst-affected banks, with the largest portfolios of bad assets, are the very same organisations that, in the good times, devoted most of their lending to fund derivatives, buyouts and other non-productive forms of financial speculation and engineering. They were not the banks that supported traditional businesses still running their companies in conventional ways in the non-financial part of the economy.
The implication is that the banks' shrinkage will have a much lesser impact on GDP and corporate lending than is widely assumed. These pillars of financial probity may have lost three-quarters of their balance sheets. But it was the three-quarters they were gambling with, not the part that was being devoted to genuine wealth creation in the tractional way.
So on that basis, the banks should still have enough capacity to lend for deserving corporate causes, particularly if they are genuine in trying to go back to their roots. It is their fun money they have so carelessly lost.
Hi-tech lead for London insurers
For years one of the givens in the City has been that the use of technology in the securities markets has been light years ahead of anything happening in the insurance market. While the investment bankers live and die by their computer-driven models and trading strategies, the brokers in Lloyd's still tramp around the market carrying bundles of paper files.
That remains the image, but the insurance market has changed fundamentally in the last few years, even if outsiders don't realise it. In a speech at a conference in Brighton yesterday, a supplier of IT to the market, Xchanging's David Andrews, brought home how far this perception now lags behind reality. Now the boot is on the other foot. As Andrews pointed out, the insurance industry has proved itself a lot more adept at managing counterparty risk than have the participants in the financial derivatives markets.
The London market has something to shout about and it should be recognised for the progress it has made.
In New York, starting in 2005, the regulators began agitating for investment in infrastructure to automate processing and settlement in the fast-expanding off-exchange derivatives markets. At about the same time, the London insurance market - driven by Xchanging - decided to have another stab at automating the market's collective back office.
What New York got was foot-dragging from firms that successfully resisted an industrywide solution because they feared it would damage particular sectional interests, so that while some inefficiencies were addressed, there were no industrywide applications put in place which are capable of handling marketwide risks. The London insurance market, on the other hand, has over the same time period moved from a totally paper-based world to a single standard electronic platform with electronically-connected cash settlement.
This is something the derivatives markets would dearly love to have. In London it is now almost taken for granted. In a world changed hugely by the Lehman default, the derivatives markets are grappling with the task of unravelling the web of derivatives trades. The London insurance market, in contrast, has always had to deal with the other side when an insurance claim matures.
It is a sign of the topsy-turvy world in which we live that the London insurance market, which would never ever have dreamed of claiming global leadership in the use of technology, is now in a position to do so.
