Bank failure hits home

AS an investment bank, the work done by Lehman Brothers may not have been obvious to the average Suffolk worker.It isn't a bank with branches on the High Street where you can conduct your business - it isn't the kind of place you can head to for a loan or a mortgage.

Paul Geater

AS an investment bank, the work done by Lehman Brothers may not have been obvious to the average Suffolk worker.

It isn't a bank with branches on the High Street where you can conduct your business - it isn't the kind of place you can head to for a loan or a mortgage.

But it is - or was - a massive financial institution, trading in billions of dollars to help keep the wheels of capitalism turning.

Today it became the highest-profile casualty of the worldwide credit crunch - and its collapse will have a huge knock-on effect around the world.

It was an integral part of the global banking system, where huge corporations lend and borrow from each other. Its collapse will effect all those institutions who were owed money - in some cases billions of dollars - by it.

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Whether its collapse will directly drive any other institutions under remains to be seen - but it will certainly force managers to be even tighter with their money.

It is this fear - that credit for other companies may be more difficult to find - which sent stock markets into freefall yesterday.

And while falling stock markets may appear to be something that can only affect big financiers, or at least those with a share portfolio, in fact everyone who has a pension, a mortgage, or life assurance is likely to be hit.

It will be more difficult to get loans - and they will cost more - and businesses will not be able to borrow money to invest, which will ultimately have an effect on jobs.

Homeowners:

MORTGAGES have already become much more difficult to obtain in Britain over the last few months - the Northern Rock crisis shook the confidence of lenders who were already becoming more cautious about making home loans.

Whereas a year ago lenders were happy to advance up to 100 per cent of the cost of a property, confident that property prices would increase, now it is difficult to get a loan for more than 80 per cent of a property's value.

If you have to find a deposit of £20,000 to buy a £100,000 home, it makes life very difficult for first-time buyers.

One group of homeowners likely to be particularly badly hit are those with interest-only mortgages linked to endowment policies.

The value of endowment policies has slipped substantially in the wake of the slide in the stock market, and they are likely to find that their savings no longer cover the cost of their home.

This has come at an especially bad time because many endowment mortgages were sold during the 1980s and are now due mature - leaving homeowners facing a major shortfall.

Pensioners and those saving for a pension:

BOTH private pension funds and company pension schemes rely heavily on investments in the stock market to provide earnings for pensioners.

As the value of the stock market falls, this forces pension schemes to ask their members to provide more money to ensure their pensions in the future.

For companies, local authorities, and the government which run their own pension schemes, this can be especially difficult.

As the economy contracts, they are faced with paying higher contributions into their pension schemes - and many are also having to ask their employees to increase their contributions . . . or face the prospect of seeing their benefits reduced.

The expert view:

DR Jerome Healey from the Norwich Business School, part of the University of East Anglia, said the collapse of Lehman Brothers was a shock to the whole financial system.

He said: “From a practical point of view, there are between 5,000 and 7,000 people working at Lehman Brothers in the city, and it is fair to imagine some of those will live in the Ipswich area.

“They face losing their jobs and that would be a big blow to the local economy because many would be relatively well-paid.”

But it was the psychological impact of the collapse which could have the greatest impact on the financial sector.

“Lehman Brothers is a long-established name, and there will be a feeling 'if they can collapse, anyone can collapse,' and it will spread worry further through the whole sector.

“The downturn is now the worst we have seen since the early 1990s and it is not going to get better quickly. I'm not sure Alastair Darling wasn't overstating it when he talked about the worst economic crisis for 60 years - but it is certainly the worst for the financial sector since the 1970s,” he added.

Dr Healey said major financial institutions had not looked so vulnerable since the 1930s - the collapse of Lehman Brothers follows the enforced takeover of Bear Stearns in the US and the government bail-out of mortgage guarantee companies Freddie May and Frannie May.

“I don't know how long this will last - we are definitely in recession now - but things are likely to be gloomy for some time ahead,” he said.

The government minister's view:

PENSIONS' minister Mike O'Brien was trying to reassure people about the future of their savings during his visit to Ipswich yesterday.

“Pensions have to be regarded as a long-term investment and over the last 10 years the stock market has moved ahead very well and the value of pensions has increased substantially,” he said.

“If you look at them over a term of 40 or 50 years they should remain a good investment - but most pension companies transfer pensions nearing maturity to safer investments like government bonds for the last few years.”

Mr O'Brien said new government legislation was aimed at encouraging companies to maintain and expand occupational pension's schemes.

“I am sure pensions will remain a good investment over the long term- whatever the short-term outlook might be,” he said.

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